A
Ability-to-Pay Principle
The belief that people should be taxed according to their ability to pay, regardless of the benefits they receive. The U.S. individual income tax is based on this principle.
Absolute Advantage
The ability to produce more units of a good or service than some other producer, using the same quantity of resources.
Accounting Loss
Total explicit costs are greater than total explicit revenue which results in a loss.
Accounting Profit
Total revenue less total costs except for the opportunity cost of capital.
Adaptive Expectations
Expectations about inflation or other economic events.
Add-On Rate
A method of calculating interest on a loan, based on the assumption that the borrower holds the original principal for the entire loan period.
Adjusted Balance Method
A method of calculating finance charges by basing them on the opening balance owed after subtracting the payments made during the month.
Advertising
Using advertisements (public notices, displays or presentations often based on celebrity endorsements, appeals to authority, bandwagon effects and attractive imagery) to promote the sale of goods or services.
Aggregate Demand (AD)
A schedule (or graph) that shows the value of output (real GDP) that would be demanded at different price levels.
Aggregate Supply (AS)
A schedule (or graph) that shows the value of output (real GDP) that would be produced at different price levels. In the long run, the schedule shows a constant level of real GDP at all price levels, determined by the economy's productive capacity at full employment. In the short run, the aggregate supply schedule may show different levels of real GDP as the price level changes.
Allocative Efficiency
Taking advantage of every opportunity to make some individuals better off in their own estimation while not worsening the condition of anyone else.
Allowance
A sum of money paid regularly to a person, often by a parent to a child; sometimes paid in compensation for services rendered.
Alternative
One of many choices or courses of action that might be taken in a given situation.
Amount Past Due
In a credit arrangement, the amount of money owed and not repaid on time.
Annual Fee
The yearly charge for having a credit card or credit account.
Annual Percentage Rate (APR)
The percentage of the principal of a loan to be paid as interest in one year. Differs from an add-on rate in that an APR is calculated on the declining balance of the loan. The Truth in Lending Act requires lenders to disclose APRs to prospective borrowers.
Annual Percentage Yield
Income earned on an investment in a year, divided by the amount of the original investment.
Annual Rate of Return
Income earned on an investment in a year, divided by the amount of the original investment.
Asian Financial Crisis
The situation that began in 1997-1998 when investors withdrew large amounts of money from several Asian countries due to fears that assets were overpriced. This led to currency devaluations and set off a panic resulting in runs on banks, plummeting stock prices, business failures and loss of jobs. Some of the countries involved were Thailand, South Korea, Indonesia and Malaysia.
Asset
Something of monetary value owned by an individual or an organization.
Assumptions
Beliefs or statements presupposed to be true.
Automated Teller Machine (ATM)
A machine that provides cash and performs banking services (for deposits and transfers of funds between accounts, for example) automatically when accessed by customers using plastic cards coded with personal identification numbers (PINs).
Average Daily Balance Method
A method of calculating finance charges based on the average amount owed for each day of the billing cycle.
Average Fixed Cost (AFC)
Total fixed costs divided by the amount produced.
Average Revenue (AR)
Total revenue divided by the amount produced.
Average Variable Cost (AVC)
Total variable costs divided by the quantity produced.
B
Bait and Switch
The action (generally illegal) of advertising goods that are an apparent bargain (the bait) with the intention of inducing customers to buy more expensive items (the switch), on the pretext that the advertised item is no longer available.
Balance of Payments
The record of all transactions (in goods, services, physical and financial assets) between individuals, firms and governments of one country with those in all other countries in a given year, expressed in monetary terms.
Balance of Payments Deficit
An imbalance in a nation's balance of payments where more currency is flowing out of the country than is flowing in. This unequal flow of currency is considered unfavorable and can lead to a loss of foreign currency reserves.
Balance of Payments Surplus
An imbalance in a nation's balance of payments in which more currency is flowing into the country than is flowing out. This unequal flow of currency is considered favorable and can lead to an increase in foreign currency reserves.
Balance of Trade
The part of a nation's balance of payments accounts that deals only with its imports and exports of goods and services. The balance of trade is divided into the balance on goods (merchandise) and the balance on services. If the value of a country's exports of goods and services is greater than its imports, it has a balance of trade surplus. If the value of a country's imports of goods and services is greater than its exports, it has a balance of trade deficit.
Balance Sheet
An itemized statement listing the total assets and total liabilities of a given business to portray its net worth at a given moment in time.
Balanced Budget
A financial plan in which income is equal to expenses.
Bank
A financial institution that provides various products and services to its customers, including checking and savings accounts, loans and currency exchange.
Bank Account
An arrangement by which a bank holds funds on behalf of a depositor. Also, the balance of funds held under such an arrangement, credited to and subject to withdrawal by the depositor.
Bank Reserves
The percentage of a bank's deposits that it keeps on hand, i.e., does not lend out.
Bank Service Charges
Fees paid by bank customers for financial services, for example, check-cashing fees, fees for overdrafts from accounts, fees for using the ATMs of other banks and fees for using bank-issued credit cards.
Bank Statement
A monthly summary providing the status of a depositor's financial accounts (checking and/or savings).
Banking
The industry involved with conducting financial transactions. Also, conducting business with a bank, e.g., maintaining a checking or savings account or obtaining a loan.
Barriers to Entry
Factors that restrict entry into an industry and give cost advantages to existing firms. Examples would include the large size of existing firms, control over an essential resource or information, and legal rights such as patents and licenses.
Barriers to Trade
Restrictions on trade such as tariffs, quotas and regulations.
Barter
Trading a good or service directly for another good or service, without using money or credit.
Benefit
Monetary or non-monetary gain received because of an action taken or a decision made.
Benefits-Received Principle
The belief that people should be taxed according to the benefits they receive from the good or service the tax supports. The gasoline tax is an example.
Blue Chip Stocks
Stocks in large, nationally known companies that have been profitable for a long time and are well-known and trusted.
Board of Governors
The Federal Reserve's governing and monetary policy-making body; consists of seven governors appointed by the President to staggered 14-year terms.
Bond
A certificate of indebtedness issued by a government or a publicly held corporation, promising to repay borrowed money to the lender at a fixed rate of interest and at a specified time.
Borrow
To receive and use something belonging to somebody else, with the intention of returning or repaying it--often with interest in the case of borrowed money.
Borrower
An individual who has received and used something belonging to somebody else, with the intention of returning or repaying it--often with interest in the case of borrowed money.
Brand
A trade name used to identify a product produced by a particular company, distinguishing it from similar products produced by competitors.
Budget
A spending-and-savings plan, based on estimated income and expenses for an individual or an organization, covering a specific time period.
Budget Deficit
Refers to national budgets; occurs when government spending is greater than government income in a given year. A yearly deficit adds to the public debt.
Budget Surplus
Refers to national budgets; occurs when government income is greater than government spending in a given year.
Business
Any activity or organization that produces or exchanges goods or services for a profit.
Business Cycles
Fluctuations in the overall rate of national economic activity with alternating periods of expansion and contraction; these vary in duration and degrees of severity; usually measured by real gross domestic product (GDP).
Business Plan
A description of an enterprise including its name, its goals and objectives, the product(s) sold and distributed, the work skills needed to produce those products, and the marketing strategies used to promote them.
Businesses and Households
Two sectors of the circular flow. Businesses hire resources from households; the payments for these resources represent household income. Households spend their income for goods and services produced by the businesses; household spending represents revenue for businesses.
C
Capacity
In the context of credit transactions, capacity is one of the Three Cs of Credit. It is an indicator of how creditworthy a prospective borrower is likely to be, as determined by the borrower's current and future earnings relative to current debt. High earnings and low debt, for example, indicate a strong capacity to make payments on the loan in question.
Capital
Resources and goods made and used to produce other goods and services. Examples include buildings, machinery, tools and equipment. In the context of credit transactions, capital is one of the Three Cs of Credit. It is an indicator of how creditworthy a prospective borrower is likely to be as determined by the borrower's current financial assets and net worth.
Capital Account
Part of a nation's balance of payments accounts; records capital outflows, i.e., expenditures made by the nation's residents to purchase physical capital and financial assets from the residents of foreign nations; also records capital inflows, i.e., expenditures by residents of foreign nations to purchase physical capital and financial assets from residents of the nation in question.
Capital Account Balance
Foreign government and private investment in the United States netted against similar U.S. investment in foreign countries.
Capital Gain
A profit realized from the sale of property, stocks or other investments.
Capital Loss
A loss suffered upon the sale of property, stocks or other investments for less money than the purchase price of the asset in question.
Capital Resources
Resources made and used to produce and distribute goods and services; examples include tools, machinery and buildings.
Cash
Money in the form of paper currency or coins (as distinct from checks, money orders or credit).
Cash Advance
In a credit arrangement, the amount charged to a borrower's account for cash received; an instant loan.
Cash Available
In a credit arrangement, the difference between the cash-advance limit and withdrawals made (advances issued); the remaining balance.
Cash-Advance Limit
In a credit arrangement, the maximum amount that can be issued for a cash advance.
Causes of Inflation
Too much money chasing too few goods is common cause for inflation. Additionally, a rise in production costs can also lead to a rise in inflation. International lending and federal taxes can also be causes of inflation, while war is also a leading cause of inflation as well.
Central Banking System
A nation's central bank that is established to regulate the money supply and oversee the nation's banks. In the United States the Federal Reserve is the central bank.
Certificate of Deposit (CD)
A certificate issued by a bank to a person depositing money in an account for a specified period of time (often six months, one year or two years). A penalty is charged for early withdrawal from CD accounts.
Character
In the context of credit transactions, character is one of the Three Cs of Credit. It is an indicator of how creditworthy a prospective borrower is likely to be, as determined by the borrower's handling of past debts and his or her stability in jobs and residences.
Characteristics of Money
Characteristics of money include it being durable (both physically and socially), divisible (money can be divided into increments appropriate for the cost of an item), transportable (literally meaning that money must be easy to move), and the ability to regulate the amount of money in a market by making it uncounterfeitable.
Check
A written order to a financial institution directing the financial institution to pay a stated amount of money, as instructed, from the customer's account.
Check Register
A form (usually located in the back of a checkbook) on which users of checking accounts may record checks they have written and deposits they have made. Information thus recorded helps people keep track of balances in their accounts.
Checking Account
A financial account into which people deposit money and from which they withdraw money by writing checks.
Choice
Decision made or course of action taken when faced with a set of alternatives.
Circular Flow
The movement of output and income from one sector of the economy to another; often illustrated as a circular flow diagram.
Coincident Indicators
Economic variables, such as payroll employment, industrial production, personal income, and manufacturing and trade sales, that tend to change at the same time that real output changes.
Coins
Government-issued pieces of metal that have value and are used as money.
Collateral
Something of value (often a house or a car) pledged by a borrower as security for a loan. If the borrower fails to make payments on the loan, the collateral may be sold; proceeds from the sale may then be used to pay down the unpaid debt.
Collision Insurance Coverage
Insurance that pays for repairs to an automobile, or replacement of the automobile (minus the deductible in each case), if the automobile is hit by another car.
Collusion
A secret agreement between firms to fix prices or engage in other activities to restrict competition in an industry; illegal in the United States.
Command Economy
An economy in which most economic issues of production and distribution are resolved through central planning and control.
Commodities Market
The market for the purchase and sale of commodity (a basic product, usually, but not always, agricultural or mineral) futures, contracts for the sale and delivery of commodities at some future time.
Communism
In theory, an economic system based on a classless society, common ownership of all resources, the complete disappearance of government and income allocated according to need. In practice, communism usually refers to the command economic system in existence in the former Soviet Union before its downfall in 1990-1991, and in other countries such as China and Cuba.
Communities and Cities
A community can be considered a social group which retains an environment, while sharing interest in economic progress. A city can be considered a financial and commercial center.
Comparative Advantage
The ability to produce a good or service at a lower opportunity cost than some other producer. This is the economic basis for specialization and trade.
Comparison Shopping
Examining different brands or models of a product (to learn about variations in quality, size, etc.), or the prices charged by different sellers (to learn about possible cost-savings), before deciding what to buy.
Competition
Attempts by two or more individuals or organizations to acquire the same goods, services, or productive and financial resources. Consumers compete with other consumers for goods and services. Producers compete with other producers for sales to consumers.
Complementary Goods and Services
Goods and/or services that are typically used together, such as hamburger and hamburger buns, or tennis rackets and tennis lessons.
Complements
Goods and/or services that are often consumed together; e.g., left and right socks, or tennis rackets and tennis lessons.
Compound Interest
Interest that is earned not only on the principal but also on the interest already earned.
Compounding
Paying interest on the principal and on interest already earned. For example, if someone deposits $2,000 in an account that pays interest at 8 percent, he or she will earn $160 in interest after one year, for a balance of $2,160. If the depositor leaves this sum in the account for another year, however, he or she will earn $172.80 in interest because the 8 percent rate will apply to the new balance of $2,160, not the original $2,000 deposit. The longer the money is left in the account, the more dramatic the compounding effect.
Comprehensive Insurance Coverage
Insurance that pays for repairs to an automobile, or replacement of an automobile (minus the deductible in each case), if the automobile is stolen or damaged by something other than a collision (for example, by a hail storm).
Concentration Ratio
The percentage of the total industry by the largest firms (generally four or eight) in an industry. The concentration ratio provides a measure of domination in an industry by a few firms and serves as a measure of whether an industry is an oligopoly.
Consequence
A result or effect of an action or decision; may be positive or negative.
Consume
To buy and use a good or service.
Consumer Economics
The study of economics that addresses decisions of consumers in the marketplace and personal money management.
Consumer Price Index (CPI)
A price index that measures the cost of a fixed basket of consumer goods and services and compares the cost of this basket in one time period with its cost in some base period. Changes in the CPI are used to measure inflation.
Consumer Surplus
The difference between the price a consumer would be willing to pay for a good or service and the price that consumer actually has to pay.