The nonaccelerating inflation rate of unemployment.

Nash Equilibrium

In game theory, the result of all players playing their best strategy given what their competitors are doing.

National Income

The total income earned by the factors of production owned by a country’s citizens.

National Income and Product Accounts

Data collected and published by the government describing the various components of national income and output in the economy.

Natural Monopoly

An industry that realizes such large economies of scale in producing its product that single-firm production of that good or service is most efficient.

Natural Rate of Population Increase

The difference between the birth rate and the death rate. It does not take migration into account.

Natural Rate of Unemployment

The unemployment that occurs as a normal part of the functioning of the economy. Sometimes taken as the sum of frictional unemployment and structural unemployment.

Near Monies

Close substitutes for transactions money, such as savings accounts and money market accounts.

Negative Demand Shock

Something that causes a negative shift in consumption or investment schedules or that leads to a decrease in U.S. exports.

Net Exports (EX-IM)

The difference between exports (sales to foreigners of U.S. produced goods and services) and imports (U.S. purchases of goods and services from abroad). i.e. The difference between a country’s total exports and total imports. (This figure can be either positive or negative.)

Net Factor Payments to the Rest of the World

Payments of factor income to the rest of the world minus the receipt of factor income from the rest of the world.

Net Interest

The interest paid by business.

Net Investment

Gross investment minus depreciation.

Net National Product (NNP)

Gross national product minus depreciation; a nation’s total product minus what is required to maintain the value of its capital stock.

Nominal GDP

Gross domestic product measured in current dollars.

Nominal Wage Rate

The wage rate in current dollars.

Nondurable Goods

Goods that are used up fairly quickly, such as food and clothing.


A characteristic of most public goods: Once a good is produced, no one can be excluded from enjoying its benefits.

Nonlabor, or Nonwage, Income

Any income received from sources other than working—inheritances, interest, dividends, transfer payments, and so on.

Nonresidential Investment

Expenditures by firms for machines, tools, plants, and so on.

Nonrival in Consumption

A characteristic of public goods: One person’s enjoyment of the benefits of a public good does not interfere with another’s consumption of it.

Nonsynchronization of Income and Spending

The mismatch between the timing of money inflow to the household and the timing of money outflow for household expenses.

Normal Goods

Goods for which demand goes up when income is higher and for which demand goes down when income is lower.

Normal Rate of Return

A rate of return on capital that is just sufficient to keep owners and investors satisfied. For relatively risk-free firms, it should be nearly the same as the interest rate on risk-free government bonds.

Normative Economics

An approach to economics that analyzes outcomes of economic behavior, evaluates them as good or bad, and may prescribe courses of action. Also called policy economics.

North American Free-Trade Agreement (NAFTA)

An agreement signed by the United States, Mexico, and Canada in which the three countries agreed to establish all North America as a free-trade zone.

Not In the Labor Force

A person who is not looking for work, either because he or she does not want a job or has given up looking.

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Ockham’s Razor

The principle that irrelevant detail should be cut away.

Okun’s Law

The theory, put forth by Arthur Okun, that the unemployment rate decreases about 1 percentage point for every 3 percent increase in real GDP. Later research and data have shown that the relationship between output and unemployment is not as stable as Okun’s “Law” predicts.


A form of industry (market) structure characterized by a few dominant firms. Products may be homogeneous or differentiated. The behavior of any one firm in an oligopoly depends to a great extent on the behavior of others.

Open Market Desk

The office in the New York Federal Reserve Bank from which government securities are bought and sold by the Fed.

Open Market Operations

The purchase and sale by the Fed of government securities in the open market; a tool used to expand or contract the amount of reserves in the system and thus the money supply.

Operating Profit (or Loss) or net operating revenue

Total revenue minus total variable cost (TR-TVC).

Opportunity Cost

The best alternative that we forgo, or give up, when we make a choice or a decision.

Optimal Level of Provision for Public Goods

The level at which resources are drawn from the production of other goods and services only to the extent that people want the public good and are willing to pay for it. At this level, society’s willingness to pay per unit is equal to the marginal cost of producing the good.

Optimal Method of Production

The production method that minimizes cost.

Optimal Scale of Plant

The scale of plant that minimizes average cost.

Output Effect of a Factor Price Increase (Decrease)

When a firm decreases (increases) its output in response to a factor price increase (decrease), this decreases (increases) its demand for all factors.


Usable products.

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Pareto Efficiency or Pareto Optimality

A condition in which no change is possible that will make some members of society better off without making some other members of society worse off.

Partial Equilibrium Analysis

The process of examining the equilibrium conditions in individual markets and for households and firms separately.


A barrier to entry that grants exclusive use of the patented product or process to the inventor.

Per Capita GDP or GNP

A country’s GDP or GNP divided by its population.

Per Se Rule

A rule enunciated by the courts declaring a particular action or outcome to be a per se (intrinsic) violation of antitrust law, whether the result is reasonable or not.

Perfect Competition

An industry structure in which there are many firms, each small relative to the industry, producing virtually identical products and in which no firm is large enough to have any control over prices. In perfectly competitive industries, new competitors can freely enter and exit the market.

Perfect Knowledge

The assumption that households possess a knowledge of the qualities and prices of everything available in the market, and that firms have all available information concerning wage rates, capital costs, and output prices.

Perfect Substitutes

Identical products.

Perfectly Contestable Market

A market in which entry and exit are costless.

Perfectly Elastic Demand

Demand in which quantity demanded drops to zero at the slightest increase in price.

Perfectly Inelastic Demand

Demand in which quantity demanded does not respond at all to a change in price.

Permanent Income

The average level of one’s expected future income stream.

Personal Consumption Expenditures (C)

A major component of GDP: expenditures by consumers on goods and services.

Personal Income

The total income of households. Equals (national income) minus (corporate profits minus dividends) minus (social insurance payments) plus (interest income received from the government and households) plus (transfer payments to households). The income received by households after paying social insurance taxes but before paying personal income taxes.

Personal Saving

The amount of disposable income that is left after total personal spending in a given period.

Personal Saving rate

The percentage of disposable personal income that is saved. If the personal saving rate is low, households are spending a large amount relative to their incomes; if it is high, households are spending cautiously.

Phillips Curve

A graph showing the relationship between the inflation rate and the unemployment rate.

Physical or Tangible, Capital

Material things used as inputs in the production of future goods and services. The major categories of physical capital are nonresidential structures, durable equipment, residential structures, and inventories.

Planned Aggregate Expenditure (AE)

The total amount the economy plans to spend in a given period. Equal to consumption plus planned investment: AE=C+I.

Plant-and-Equipment Investment

Purchases by firms of additional machines, factories, or buildings within a given period.

Policy Mix

The combination of monetary and fiscal policies in use at a given time.

Positive Economics

An approach to economics that seeks to understand behavior and the operation of systems without making judgments. It describes what exists and how it works.

Post Hoc, Ergo Propter Hoc

Literally, “after this (in time), therefore because of this.’’ A common error made in thinking about causation: If Event A happens before Event B, it is not necessarily true that A caused B.

Potential Output, or Potential GDP

The level of aggregate output that can be produced given full employment of resources.

Poverty Line

The officially established income level that distinguishes the poor from the nonpoor. It is set at three times the cost of the Department of Agriculture’s minimum food budget.


The amount that a product sells for per unit. It reflects what society is willing to pay.

Price Ceiling

A maximum price that sellers may charge for a good, usually set by government.

Price Elasticity of Demand

The ratio of the percentage of change in quantity demanded to the percentage of change in price; measures the responsiveness of demand to changes in price.

Price Feedback Effect

The process by which a domestic price increase in one country can “feed back” on itself through export and import prices. An increase in the price level in one country can drive up prices in other countries. This in turn further increases the price level in the first country.

Price Leadership

A form of oligopoly in which one dominant firm sets prices and all the smaller firms in the industry follow its pricing policy.

Price Rationing

The process by which the market system allocates goods and services to consumers when quantity demanded exceeds quantity supplied.

Price Surprise

Actual price level minus expected price level.

Private Goods

Products produced by firms for sale to individual households.

Privately Held Federal Debt

The privately held (non-government-owned) debt of the U.S. government.

Producer Price Indexes (PPIs)

Measures of prices that producers receive for products at all stages in the production process.


Those people or groups of people, whether private or public, who transform resources into usable products.

Product Differentiation

A strategy that firms use to achieve market power. Accomplished by producing products that have distinct positive identities in consumers’ minds.

Product or Output Markets

The markets in which goods and services are exchanged.


The process by which inputs are combined, transformed, and turned into outputs.

Production Function or Total Product Function

A numerical or mathematical expression of a relationship between inputs and outputs. It shows units of total product as a function of units of inputs.

Production Possibility Frontier (PPF)

A graph that shows all the combinations of goods and services that can be produced if all of society’s resources are used efficiently.

Production Technology

The quantitative relationship between inputs and outputs.

Productivity of an Input

The amount of output produced per unit of an input.

Productivity, or Labor Productivity

Output per worker hour; the amount of output produced by an average worker in 1 hour.


The excess of revenues over cost in a given period.

Profit (Economic Profit)

The difference between total revenue and total cost.

Property Income

Income from the ownership of real property and financial holdings. It takes the form of profits, interest, dividends, and rents.

Proprietors’ Income

The income of unincorporated businesses.


The practice of shielding a sector of the economy from foreign competition.

Public Assistance, or Welfare

Government transfer programs that provide cash benefits to (1) families with dependent children whose incomes and assets fall below a very low level and (2) the very poor regardless of whether or not they have children.

Public Choice Theory

An economic theory that the public officials who set economic policies and regulate the players act in their own self-interest, just as firms do.

Public Goods, or Social Goods

Goods or services that bestow collective benefits on members of society. Generally, no one can be excluded from enjoying their benefits. The classic example is national defense.

Purchasing-Power-Parity Theory

A theory of international exchange holding that exchange rates are set so that the price of similar goods in different countries is the same.

Pure Monopoly

An industry with a single firm that produces a product for which there are no close substitutes and in which significant barriers to entry prevent other firms from entering the industry to compete for profits.

Pure Rent

The return to any factor of production that is in fixed supply.

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Quantity Demanded

The amount (number of units) of a product that a household would buy in a given period if it could buy all it wanted at the current market price.

Quantity Supplied

The amount of a particular product that a firm would be willing and able to offer for sale at a particular price during a given time period.

Quantity Theory of Money

The theory based on the identity M3V=P3Y and the assumption that the velocity of money (V) is constant (or virtually constant).


Waiting in line as a means of distributing goods and services; a nonprice rationing mechanism.


A limit on the quantity of imports.

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Ration Coupons

Tickets or coupons that entitle individuals to purchase a certain amount of a given product per month.

Rational-Expectations Hypothesis

The hypothesis that people know the “true model” of the economy and that they use this model to form their expectations of the future.

Rawlsian Justice

A theory of distributional justice that concludes that the social contract emerging from the “original position” would call for an income distribution that would maximize the well-being of the worst-off member of society.

Real Business Cycle Theory

An attempt to explain business cycle fluctuations under the assumptions of complete price and wage flexibility and rational expectations. It emphasizes shocks to technology and other shocks.

Real Interest Rate

The difference between the interest rate on a loan and the inflation rate.

Real Wage Rate

The amount that the nominal wage rate can buy in terms of goods and services.

Real Wealth, or Real Balance, Effect

The change in consumption brought about by a change in real wealth that results from a change


Roughly, a period in which real GDP declines for at least two consecutive quarters. Marked by falling output and rising unemployment.

Recognition Lag

The time it takes for policy makers to recognize the existence of a boom or a slump.

Relative-Wage Explanation of Unemployment

An explanation for sticky wages (and therefore unemployment): If workers are concerned about their wages relative to other workers in other firms and industries, they may be unwilling to accept a wage cut unless they know that all other workers are receiving similar cuts.

Rent-Seeking Behavior

Actions taken by households or firms to preserve positive profits.

Rental Income

The income received by property owners in the form of rent.

Required Reserve Ratio

The percentage of its total deposits that a bank must keep as reserves at the Federal Reserve.


The deposits that a bank has at the Federal Reserve bank plus its cash on hand.

Residential Investment

Expenditures by households and firms on new houses and apartment buildings.

Resources or Inputs

Anything provided by nature or previous generations that can be used directly or indirectly to satisfy human wants.

Response Lag

The time that it takes for the economy to adjust to the new conditions after a new policy is implemented; the lag that occurs because of the operation of the economy itself.

Rule of Reason

The criterion introduced by the Supreme Court in 1911 to determine whether a particular action was illegal ('unreasonable') or legal ('reasonable') within the terms of the Sherman Act.

Run on a Bank

Occurs when many of those who have claims on a bank (deposits) present them at the same time.

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Saving (S)

The part of its income that a household does not consume in a given period. Distinguished from savings, which is the current stock of accumulated saving.


The things we buy that do not involve the production of physical things, such as legal and medical services and education.

Shares of Stock

Financial instruments that give to the holder a share in the firm's ownership and therefore the right to share in the firm's profits.

Sherman Act

Passed by Congress in 1890, the act declared every contract or conspiracy to restrain trade among states or nations illegal and declared any attempt at monopoly, successful or not, a misdemeanor. Interpretation of which specific behaviors were illegal fell to the courts.

Shift of a Demand Curve

The change that takes place in a demand curve corresponding to a new relationship between quantity demanded of a good and price of that good. The shift is brought about by a change in the original conditions.

Shock Therapy

The approach to transition from socialism to market capitalism that advocates rapid deregulation of prices, liberalization of trade, and privatization.

Short Run

The period of time for which two conditions hold: The firm is operating under a fixed scale (fixed factor) of production, and firms can neither enter nor exit an industry.

Short-Run Industry Supply Curve

The sum of marginal cost curves (above AVC) of all the firms in an industry.

Shut-Down Point

The lowest point on the average variable cost curve. When price falls below the minimum point on AVC, total revenue is insufficient to cover variable costs and the firm will shut down and bear losses equal to fixed costs.

Smoot-Hawley Tariff

The U.S. tariff law of the 1930s, which set the highest tariffs in U.S. history (60 percent). It set off an international trade war and caused the decline in trade that is often considered a cause of the worldwide depression of the 1930s.

Social Capital, or Infrastructure

Capital that provides services to the public. Most social capital takes the form of public works (roads and bridges) and public services (police and fire protection).

Social Choice

The problem of deciding what society wants. The process of adding up individual preferences to make a choice for society as a whole.

Social Overhead Capital

Basic infrastructure projects such as roads, power generation, and irrigation systems.

Social Security System

The federal system of social insurance programs. It includes three separate programs that are financed through separate trust funds: the Old Age and Survivors Insurance program (OASI), the Disability Insurance program (DI), and the Health Insurance program (HI, or Medicare).

Social, or Implicit, Contracts

Unspoken agreements between workers and firms that firms will not cut wages.

Socialist Economy

An economy in which most capital is owned by the government private citizens. Also called social ownership.

Speculation Motive

One reason for holding bonds instead of money: Because the market value of interest-bearing bonds is inversely related to the interest rate, investors may wish to hold bonds when interest rates are high with the hope of selling them when interest rates fall.

Spreading Overhead

The process of dividing total fixed costs by more units of output. Average fixed cost declines as quantity rises.


A condition in which output is steady or growing, with low inflation and full employment of resources.

Stabilization Policy

Describes both monetary and fiscal policy, the goals of which are to smooth out fluctuations in output and employment and to keep prices as stable as possible.

Stabilization Program

An agreement between a borrower country and the International Monetary Fund in which the country agrees to revamp its economic policies to provide incentives for higher export earnings and lower imports.


Occurs when the overall price level rises rapidly (inflation) during periods of recession or high and persistent unemployment (stagnation).

Sticky Prices

Prices that do not always adjust rapidly to maintain equality between quantity supplied and quantity demanded.

Sticky Wages

The downward rigidity of wages as an explanation for the existence of unemployment.

Store of Value

An asset that can be used to transport purchasing power from one time period to another.

Structural Adjustment

A series of programs in developing nations designed to (1) reduce the size of their public sectors through privatization and/or expenditure reductions, (2) decrease their budget deficits, (3) control inflation, and (4) encourage private saving and investment through tax reform.

Structural Deficit

The deficit that remains at full employment.

Structural Unemployment

The portion of unemployment that is due to changes in the structure of the economy that result in a significant loss of jobs in certain industries.


Payments made by the government for which it receives no goods or services in return.


Goods that can serve as replacements for one another; when the price of one increases, demand for the other goes up.

Sunk Costs

Costs that cannot be avoided, regardless of what is done in the future, because they have already been incurred.

Supply Curve

A graph illustrating how much of a product a firm will supply at different prices.

Supply Schedule

A table showing how much of a product firms will supply at different prices.

Supply-Side Policies

Government policies that focus on stimulating aggregate supply instead of aggregate demand.

Sustained Inflation

Occurs when the overall price level continues to rise over some fairly long period of time.

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Tacit Collusion

Collusion occurs when price- and quantity-fixing agreements among producers are explicit. Tacit collusion occurs when such agreements are implicit.


A tax on imports.

Tax Multiplier

The ratio of change in the equilibrium level of output to a change in taxes.

Technological Change

The introduction of new methods of production or new products intended to increase the productivity of existing inputs or to raise marginal products.

Terms of Trade

The ratio at which a country can trade domestic products for imported products.

Theory of Comparative Advantage

Ricardo's theory that specialization and free trade will benefit all trading partners (real wages will rise), even those that may be absolutely less efficient producers.

Three Basic Questions

The questions that all societies must answer: (1) What will be produced? (2) How will it be produced? (3) Who will get what is produced?

Tiebout Hypothesis

An efficient mix of public goods is produced when local land/housing prices and taxes come to reflect consumer preferences just as they do in the market for private goods.

Tight Monetary Policy

Fed policies that contract the money supply in an effort to restrain the economy.

Time Lags

Delays in the economy's response to stabilization policies.

Total Cost (Total Economic Cost)

The total of (1) out-of-pocket costs, (2) normal rate of return on capital, and (3) opportunity cost of each factor of production.

Total Cost (TC)

Fixed costs plus variable costs.

Total Fixed Costs (TFC) or overhead

The total of all costs that do not change with output, even if output is zero.

Total Revenue (TR)

The total amount that a firm takes in from the sale of its product: The price per unit times the quantity of output the firm decides to produce (P3q).

Total Utility

The total amount of satisfaction obtained from consumption of a good or service.

Total Variable Cost (TVC)

The total of all costs that vary with output in the short run.

Total Variable Cost Curve

A graph that shows the relationship between total variable cost and the level of a firm's output.

Trade Deficit

Occurs when a country's exports of goods and services are less than its imports of goods and services in a given period.

Trade Feedback

EffectThe tendency for an increase in the economic activity of one country to lead to a worldwide increase in economic activity, which then feeds back to that country.

Trade Surplus

The situation when a country exports more than it imports.

Tragedy of Commons

The idea that collective ownership may not provide the proper private incentives for efficiency because individuals do not bear the full costs of their own decisions but do enjoy the full benefits.

Transaction Motive

The main reason that people hold money—to buy things.

Transfer Payments

Cash payments made by the government to people who do not supply goods, services, or labor in exchange for these payments. They include social security benefits, veterans' benefits, and welfare payments.

Treasury Bonds, Notes, and Bills

Promissory notes issued by the federal government when it borrows money.


An arrangement in which shareholders of independent firms agree to give up their stock in exchange for trust certificates that entitle them to a share of the trust's common profits. A group of trustees then operates the trust as a monopoly, controlling output and setting price.

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U.S.-Canadian Free-Trade Agreement

An agreement in which the United States and Canada agreed to eliminate all barriers to trade between the two countries by 1998.

Unconstrained Supply of Labor

The amount a household would like to work within a given period at the current wage rate if it could find the work.

Underground Economy

The part of the economy in which transactions take place and in which income is generated that is unreported and therefore not counted in GDP.


A person 16 years old or older who is not working, is available for work, and has made specific efforts to find work during the previous 4 weeks.

Unemployment Compensation

A state government transfer program that pays cash benefits for a certain period of time to laid-off workers who have worked for a specified period of time for a covered employer.

Unemployment Rate

The ratio of the number of people unemployed to the total number of people in the labor force.

Unit of Account

A standard unit that provides a consistent way of quoting prices.

Unitary Elasticity

A demand relationship in which the percentage change in quantity of a product demanded is the same as the percentage change in price in absolute value (a demand elasticity of 21).

Utilitarian Justice

The idea that 'a dollar in the hand of a rich person is worth less than a dollar in the hand of a poor person.' If the marginal utility of income declines with income, transferring income from the rich to the poor will increase total utility.

Utility Possibilities Frontier

A graphic representation of a two-person world that shows all points at which A's utility can be increased only if B's utility is decreased.


The satisfaction, or reward, a product yields relative to its alternatives. The basis of choice.

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Value Added

The difference between the value of goods as they leave a stage of production and the cost of the goods as they entered that stage.


A measure that can change from time to time or from observation to observation.

Variable Cost

A cost that depends on the level of production chosen.

Velocity of Money

The number of times a dollar bill changes hands, on average, during a year; the ratio of nominal GDP to the stock of money.

Vicious-Circle-of-Poverty Hypothesis

Suggests that poverty is self-perpetuating because poor nations are unable to save and invest enough to accumulate the capital stock that would help them grow.

Voting Paradox

A simple demonstration of how majority-rule voting can lead to seemingly contradictory and inconsistent results. A commonly cited illustration of the kind of inconsistency described in the impossibility theorem.

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Wealth or Net Worth

The total value of what a household owns minus what it owes. It is a stock measure.


The importance attached to an item within a group of items.

Wheeler-Lea Act (1938)

Extended the language of the Federal Trade Commission Act to include 'deceptive' as well as 'unfair' methods of competition.

World Bank

An international agency that lends money to individual countries for projects that promote economic development.

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The horizontal axis in the Cartesian Coordinate System



The vertical axis in the Cartesian Coordinate System

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