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Business terms can be complicated. Here’s your guide to the 213 economic terms most often encountered by journalists. These terms are part of the common language of economists. Your mastery of these terms will take you a long way down the road of economic understanding. The FACS economists in the Sources section of FACSNET and the FACS News Backgrounders can provide you more assistance in your coverage of important economic stories.


Absolute Advantage
The ability of a producer to produce a higher absolute quantity of a good with the productive resource available.

A term that applies when individuals can obtain all the goods they want without cost. If a good is abundant, it is free.

The causal relationship between changes in consumption and changes in investment.

Activist Fiscal Policy
Use of the federal governments taxing, spending and borrowing powers in order to stimulate economic growth and employment.

Actual Turnover
The number of times individuals actually spend their average money holding over a given period of time. Actual turnover is determined by the proportion of income that people receive and actually retain as money balances over a given period of time.

Antitrust Laws
Designed to promote open markets by limiting practices that reduce competition.

What a person or business owns.

Automatic Stabilizers
Measures built into the governments budget that cause its spending to increase and its tax revenues to decrease when the economy goes into slumps, and that cause government expenditures to decrease and taxes to increase when the economy goes into booms.

Balance of Payments
A record of all the financial transactions between a country and the rest of the world during a given year.

Bank Reserves
The total quantity of Federal Reserve notes held in bank vaults or checkable deposits held by the banks at the Fed district banks.

Benefits in Kind
Non cash forms of pay or assistance.

Bracket Creep
The process by which inflation drives personal incomes upward into higher tax brackets: in a progressive income tax system, this causes an increase in tax burdens.

Bretton Woods
An international monetary system operating from 1946-1973. The value of the dollar was fixed in terms of gold, and every other country held its currency at a fixed exchange rate against the dollar; when trade deficits occurred, the central bank of the deficit country financed the deficit with its reserves of international currencies.

Business Cycles
Periodic swings in the pace of national economic activity, characterized by alternating expansion and contraction phases.


The existing stock of productive resources, such as machines and buildings, that have been produced.

Capital Intensive
Production methods with a high quantity of capital per worker.

Capitalist Economies
Economies which use market-determined prices to guide peoples choices about the production and distribution of goods; these economies generally have productive resource which are privately owned.

Central Bank Intervention
Influence on exchange rates in the foreign exchange market when exchange rates are not fixed by law; i.e., a central bank buys its country’s currency with foreign currencies to drive its currency up in value; to drive it down, a central bank sells its currencies in return for foreign currencies.

Change in Demand
A shift in the entire demand curve so that at any given price, people will want to buy a different amount. A change in demand is caused by some change other than a change in the goods price.

Change in Quantity Demanded
Movement up or down a given demand curve caused by a change in the goods price with no shift in the curve itself.

Change in Quantity Supplied
A price change causing movement along the supply curve but no shift in the position of the curve itself.

Change in Supply
A change in one of the cost determinants of supply causing a shift in the position of the supply curve. Choice: The act of selecting among alternatives, a concept crucial to economics.

Civilian Labor Force
All persons over the age of sixteen who are not in the armed forces nor institutionalized and who are either employed or unemployed.

Common Property Resources
Resources for which there are no clearly defined property rights; property owned in common by a society.

Comparative Advantage
The ability of a producer to produce a good at a lower marginal cost than other producers; marginal cost in the sacrifice of some other good compared to the amount of a good obtained.

Rivalry among individuals in order to acquire more of something that is scarce.

A price change for one product leads to a shift in the opposite direction direction in the demand for another product.

Comprehensive Employment and Training Act (CETA)
Federal funding for local governments to retrain and employ difficult-to-hire workers.

Consumer Price Index (CPI)
A measure of the average amount (price) paid for a market basket of goods and services by a typical U.S. consumer in comparison to the average paid for the same basket in an earlier base year.

Consumption Expenditures
The total dollar value of all goods and services purchased by the household sector for current use.

Consumption Function
A mathematical expression relating personal consumption expenditures to disposable income.

Contraction Phase
The part of the business cycle when GNP, employment and production are on the decline.

Corn Laws
Tariffs which England placed on grain imports from 1815 to 1846. By restricting the supply or grain in England, these laws raised the price of grain in England and increased the value of English farmland.

The most valuable opportunity forsaken when a choice is made.

Cost-of-Living Adjustments
Automatic adjustments in incomes paid to individual recipients which are tied to the inflation rate, usually measured by the Consumer Price Index.

Cost-Push Inflation
A term that applies when increases in the price level are caused by increases in cost.

Council of Economic Advisors
Three persons who act as the Presidents chief economic advisers.

Craft Unions
Exclusive combinations of workers in individual trades such as printers, shoemakers and bakers.

The capacity to borrow money up to a specified limit under specified conditions.

Crowding In
Increase of private investment through the income-raising effect of government spending financed by deficits.

Crowding Out
The tendency for federal government, by deficit financing to compete with firms or persons for borrowed funds; that is, firms and households unable to borrow at a low rate of interest curtail their investment and consumption spending.

Paper money issued by the government.

Current Account
A category in the balance of payments account that includes all transactions that either contribute to national income or involve the spending of national income.

Cyclical Unemployment
Temporary layoff of workers due to downturns in the pace of economic activity.


Deficit Spending
A term which refers to the situation wherein he government spends more than it receives in taxes.

The maximum quantities of some good that people will choose (or buy) at different prices. An identical definition is the relative value of the marginal unit of some good when different quantities of that good are available.

Demand Curve
A graphic representation of the relationship between prices and the corresponding quantities demanded per time period.

Demand Deposits
Checking accounts in commercial banks. These banks are obliged to pay out funds when depositors write checks on those numbers. Checking accounts are not cash — they are numbers recorded in banks.

Demand-Pull Inflation
A term used when an increase in aggregate demand occurs which cannot be offset by a corresponding increase in real supply causing an increase in the price level (inflation).

Diminishing Relative Value
The principle that if all other factors remain constant, and individuals relative value of a good will decline as more of that good is obtained. Accordingly, the relative value of a good will increase, other factors remaining constant, as an individual gives up more of that good.

Diminishing Returns
As more and more of a productive resource is added to a given amount to other productive resources, additions to output will eventually diminish other factors, such as technology and the degree of specialization remaining constant.

Discount Rate
The interest a private bank pays for a loan from the US Federal Reserve System.

Discretionary Fiscal Policy
Changes in a fiscal (tax or spending) program initiated by the government in order to change aggregate demand.

The quantity demanded does not equal the quantity supplied at the going price.

A slowdown in the rate of inflation.

Disposable Income
The amount of an individuals income that remains after the deduction of income taxes.

Profits of a firm that are distributed to its investors (stockholders).

Division of Labor
Assigning of specific tasks to workers and productive resources; it is a reflection of economic specialization.


Economic Growth
A sustained increase in total output or output per person for an economy over a long period of time.

Economic Recovery Tax Act of 1981 (ERTA)
Designed to foster savings and investment to encourage long-term growth through reductions of personal income tax rates, taxes on personal savings for retirement and business taxes for firms investing in new capital.

Economic Regulations
The control of entry into the market, pricing, the extension of service by established firms and issues of quality control.

Economic Specialization
Concentration of activity in a few particular tasks or in producing only a few items.

The study of choice and decision-making in a world with limited resources.

The allocation of goods to their uses of highest relative value.

Elasticity of Demand
The percentage change in the quantity demanded divided by the percentage change in price.

A deliberate cutoff of supply, typically intended as a political statement.

Employment Act of 1946
Set full employment and price stability as national policy goals and established the Council of Economic Advisors.

Government transfer payments made to individuals having certain designated characteristics and circumstances, such as age or need.

Equation of Exchange (M x T = P x Q)
The equation indicates that the money supply multiplied by the number of times that money turns over equals the price level multiplied by real output.

The amount of output supplied equals the amount demanded. At equilibrium, the market has neither a tendency to rise nor fall but clears at the existing price.

The voluntary transfer of rights to use goods.

Exchange Rate
The price of one currency in terms of another.

Exchange Value
The purchasing power of a unit of currency for goods and services in the marketplace.

Exclusion Principle
The owner of a private good may exclude others from use unless they pay.

Expansion Phase
The phase of the business cycle when the economy is growing rapidly: output is increasing, employment is rising, industrial production is increasing and prices are tending to rise.

Costs or benefits that impact society but are not included in the market price of a good or service. Pollution is an example of a negative externality. Education is an example of an externality benefit when members of society other than students benefit from a more educated population. Externality is one type of market failure that causes inefficiency.


Federal Debt
The current dollar sum of obligations equal to the accumulated past deficits minus surpluses of the United States government.

Federal Deposit Insurance Corporation (FDIC)
A federal regulatory agency that insures all deposit accounts in member banks up to $100,000.

Federal Reserve System
The US central bank consisting of 12 regional banks are run by a board of governors appointed by the president for overlapping 14-year terms; formally independent of the executive and congressional branches of government; private bank members of the system own their assets.

Fiscal Policy
Those federal-government expenditure, tax and borrowing decisions that affect the level of national economic activity.

Fisher Effect
An increase in expected inflation causes a proportional increase in the market interest rate so that the expected real rate of interest remains unchanged.

Fixed Exchange Rates
The central bank holds the value of the currency constant against some foreign currency or currencies. Fixed Inputs: Inputs that cannot be changed over a given time interval.

Floating Exchange Rates
The central bank allows market supply and demand to determine currency exchange rates.

Foreign Currency Reserve
The foreign currencies that a central bank keeps on hand for intervention.

Free Good
A good which is abundant and costless.

Free Rider
One who receives something without paying.

Frictional Unemployment
Unemployment due to workers leaving old jobs and seeking new ones.

Friedman’s Law
Inflation follows excessive monetary growth with a long (about two years) and variable lag: or the rate of price change follows the rate of monetary growth.


Gains of Exchange
The difference between the relative values of a good to the buyer and the seller. How this difference is divided between buyer and seller will depend upon the price of the good. Exchange will not occur unless both the buyer and the seller expect to receive some of this gain.

GNP Deflator
Measure of the percentage increase in the average price of products in GNP over a certain base year (now 1972) published by the Commerce Department.

Anything that anyone wants. All options or alternatives are goods. Goods can be tangible or intangible.

Government Budget Constraint
Total government outlays (the sum of expenditures on goods and services, transfer payments and interest on debt) must equal total revenue (the sum of taxes and US government loans).

Government Security
A contract of the government promising to pay a lender a fixed rate of interest per year and repay the original loan at a fixed future date.

Government Transfer Payment
Outlays by the government for which no good or service is received in the current period.

Gross National Product (GNP)
The total market value, in terms of current dollars, of all final goods and services produced in the US in one year.


Rapid, out-of-control inflation, at double digit rates per month and more, usually occurring only during wars and periods of severe political instability.


Income Policies
Strategies to restrict wage and price increases, ranging from “jawboning” by the president to laws that set wage and price levels.

Income Statement
An annual summary of income and expenses of a given business in order to determine the net income of the business.

Income Velocity of Money
The ratio of national income to the quantity of money in circulation; velocity measures the average number of times money changes hands in generating national income per year (monetarist theory).

Inelastic Demand
A term used when the percentage change in quantity demanded is smaller than the percentage change in price.

Modifying contracts so that their dollar terms adjust to the inflation rate as measured in an index, such as the consumer price index.

Increase in the overall level of prices over an extended period of time.

The annual earnings that are sacrificed when wealth is invested in a given asset or business. The interest sacrificed by investing in a given business is often called the cost of capital.

International Monetary Fund (IMF)
The overseer for the exchange rate system and international monetary relations.

A stock of goods or resources held by a buyer or seller in order to reduce the cost of exchange or production.

Investment Expenditures
Dollar expenditures by firms on capital goods (factories, office buildings and others structures, machinery and equipment, inventories and residential housing) used to produce other new goods and services.

Involuntary Unemployment
Potential workers able and willing to work at the existing market wage rate, are unable to find jobs.


A group of economists who emphasize an activist governmental role in economic affairs through planned changes in the federal governments expenditures and taxes.


Labor Intensive Methods
Use of low quantity of capital per worker.

Labor Productivity
The ratio of real output per unit of labor input; growth is measured by a higher ratio of outputs to inputs.

Large Econometric Models
Mathematical constructions of national economics used for policy analysis and forecasting.

Law of Demand
People purchase more of any particular good or service as its relative price falls; they purchase less as its relative price rises.

Law of Supply
At higher relative prices, the quantity supplied of a good will increase; at lower relative prices, smaller quantities will be supplied.

Legal Tender
Paper dollars and coins mandated as acceptable means of payment by the government.

All uses of time in which ones labor services are not exchanged for money. The uses of everyone’s time can be divided between employment and leisure.

Amounts owed, or the legal claims against a business or household by nonowners.

The view that governments role should be minimal, rarely interfering in the personal lives of private citizens.

Lorenz Curve
A graph which visually presents a measure of the inequality of a nations income distribution.


The total quantity of coins and paper currency classified as legal tender by government mandate that circulates in the hands of the public, plus all checking account balances the public maintains in financial institutions.

All of M1 plus savings, small time deposit account balances (less than $100,000) in financial institutions and small money market mutual funds owned by individuals.

The study of the sum total of economic activity, dealing with the issues of growth, inflation 0 and unemployment and with national economic policies relating to these issues.

Malthusian Trap
The minimum subsistence level to which humans descend as a result of geometric population growth and arithmetic resource growth.

Managed Floating
Intervention by central banks in foreign exchange markets to stabilize their currency exchange rates.

The additional or extra quantity of something. If one drinks six sodas in a day, the marginal soda would be the sixth soda.

Marginal Cost
The increase in total costs as one more unit is produced.

Marginal Productivity
The additional output obtained by adding an additional unit of a productive resource, such as labor. More precisely, marginal productivity is the change in total output divided by the change in the amount of the productive resource employed. Marginal productivity = change in total output change in amount of productive resource

Marginal Propensity to Consume (MPC)
The percentage of new or added income that is consumed.

Marginal Propensity to Save (MPS)
The percentage of new or added income that is saved.

Marginal Revenue
The addition to total revenue as one additional unit is produced and sold.

Marginal Tax Rate
The tax rate charged on the taxpayers last dollar earned; in a progressive tax system the marginal tax rate is always greater than the average tax rate.

A network in which buyers and sellers interact to exchange goods and services for money.

Market Clearing Price
A price which rations the supply of a good among competing consumers so that the quantity of the good demanded is equal to the quantity supplied.

Market Economy
A decentralized system where many buyers and sellers interact.

Merchandise Trade Balance
Category in the current account of the balance of payments which includes all traded goods (manufactured items, agricultural commodities, chemicals and all other physically tangible products).

The study of the individual parts of the economy, the household and the firm, how prices are determined and how prices determine the production, distribution and use of goods and services.

Minimum Wage
A wage below which employers may not legally pay employees for specific kinds of employment.

Followers of Milton Friedman who focus on the effect of money and monetary policy on changing price and employment levels.

Monetary Base
The total quantity of currency in circulation outside of banks plus the currency held by banks or deposited with the Fed.

Monetary Policy
The federal governments attempt to change aggregate demand through money supply changes.

The accepted common medium of exchange for goods and services in the marketplace that functions as the unit of account, a means of deferred payment and a store of value.

Money Market Mutual Funds
Shares in institutional funds invested in financial instruments such as the US Treasury securities, certificates of deposit in financial institutions (CDs) and commercial paper (IOUs of big corporations).

Money Multiplier
The process by which excess reserves create new demand deposits or money; for example, with a 10% legal reserve requirement, $10 of excess reserves may be used to create $100 of new money.

Money Supply
Legal currency and various transaction account balances held at financial institutions (M1) plus small savings and time deposit accounts of individuals (M2).

Monopolistic Competition
A market with a large number of firms selling similar but differentiated products with no significant barriers to entry.

A market with only one supplier.

The number of times new investment spending will be respent to produce a certain amount of new income.


Natural Monopoly
One producer supplying all of the market at lower costs than many producers could.

Natural Unemployment Rate
An economy’s civilian unemployment rate when supply and demand for labor are equal. The natural rate is the percentage of the civilian labor force unemployed at one time or another during any given year multiplied by the average time people spend searching for jobs.

Assets which are not directly exchangeable for goods and services but which may be readily converted into money. A savings account is an example.

A specific quantity of a specific good for which an individual would pay any price.

Net Worth
The difference between the assets and liabilities of a person or business.

New Classical Macroeconomics
See Supply-Side Economics.

New Deal
Programs initiated in the 1930s that were characterized by significantly increased government aid to various economic groups and equally significant increases in government involvement in the economy.

New Economy
Sectors of the economy that are knowledge/human-capital-based with the understanding the technology ultimately derives from human ingenuity. While human capital is a prime driver in the information technology and telecommunications sectors, it also has been responsible for significant improvements in productivity in more traditional industries such as automobiles, aircraft and agriculture.

Nominal GNP
GNP measured in current prices (see Real GNP).

Nominal Interest Rate
The cost inflicted by inflation eroding the value of stored dollars plus the forgone real interest rate; the opportunity cost of holding money.

Normative Economics
Analysis that contains value judgments, either implicitly or explicitly (see Economics or Positive Economics).


A market structure with just a few firms controlling a high percentage of total sales.

Open Market Operations
The purchase or sale of government bonds by the Federal Reserve in order to change commercial banks reserves.

Opportunity Cost
The highest-valued sacrifice needed to get a good or service.

Anything that anyone wants. In economics, options (alternatives) are also called goods.

Organization of Petroleum Exporting Countries (OPEC)
A group of nations that produce most of the worlds oil and control most of the worlds oil exports.


Paradox of Thrift
Increased saving increases withdrawals from the money flow; unless these withdrawals are successfully channeled into new investment spending, capital formation will decline.

The highest point attained in the business cycle.

Personal Saving
The difference between household income (after taxes) and consumption expenditures.

Political Economy
Policies that emphasize the interaction between politics and economics and that have political and economic effects.

The amount of money, or other goods, that you have to give up to buy a good or service.

Price Ceiling
The upper legal limit on a price.

Price Elasticity of Demand
A measure of the responsiveness of the quantity demanded of a good to changes in that goods price.

Price Floor
The lower limit imposed on a products price by a price control law.

Private Good
A good exclusively owned that cannot be simultaneously used by others.

Production Possibilities Curve
All combinations of the maximum amounts of goods that a society can produce with the available resources and technology.

Productive Resources
The inputs of labor, natural resources and capital used to generate new goods and services.

The excess of income over all costs, including the interest cost of the wealth invested. The net income of a business is not an accurate measure of its profit.

Property Rights
The conditions of ownership of an asset, the rights to own, use and sell.

Public Goods
Goods that cannot be withheld from people even if they don’t pay for them.

Pure Competition
A situation where many sellers sell the same product and no seller can set the price.


A quantitative restriction on imports.


Rational Expectations
Market participants intuitively anticipate systemic policy actions and their consequences for the economy; thus, on average, private market forecasts are accurate and planned policy is ineffectual (see New Classical Macroeconomics).

Real GNP
The GNP of any year measured in the prices of a base year. Real GNP is nominal GNP adjusted for inflation.

Real Rate of Interest
The dollar interest rate corrected for inflation; equal to the nominal rate minus the inflation rate.

Real Wage
Ones wage adjusted for inflation.

Regressive Taxes
A greater portion of income is taken from those in lower levels than from those in upper income levels.

Rent Controls
Fixed limits on rents that can be charged to tenants by owners according to a legal restriction.

Retained Earnings
Business profits which are held by firms and not paid to the stockholders of the firm; the earnings are usually reinvested by the firms.

Total gross earnings of a firm before subtracting costs.

Right-to-Work Laws
Laws banning union membership as a requirement for continued employment.


Scarce Good
A good which people want more of and which is costly to obtain.

Scarcity Shortage
A term used when the quantity of a good demanded exceeds the quantity supplied at the existing price.

Short Run
The period during which some inputs are fixed and cannot be varied.

Social Costs
Private costs plus external costs.

The view that the government should own and control major industries using the dollars earned to provide benefits to citizens.

The act of producing more of a good than one consumes, the rest of that good being exchanged.

An economic condition characterized by simultaneous inflation, slow growth and high unemployment.

Structural Unemployment
Workers without jobs whose skills are no longer suitable for or do not match the types of jobs available.

Price change for one product leads to a shift in the same direction in the demand for another product. Supply Curve: A graphic representation of the relationship between quantities supplied at each price for a given time period.

Supply-Side Economics
Focus on the effects of national output potential or supply through reduction of taxes and government regulation for businesses designed to increase productivity and economic growth.

A term used when the quantity of a good supplied exceeds the quantity demanded at the existing price.


A tax on imports.

Technological Change
An advance, usually scientific, that causes an increase in output to occur relative to the quantity of inputs.

The opportunity costs of selecting one alternative rather than another.

Terms of Trade
The relative prices of goods and services traded in international markets.

Time Deposits
Savings held in the financial institution for a fixed time period (such as six months or a year).

Transaction Costs
The full costs of making an exchange.

A point in the business cycle corresponding to the end of the slowdown and the beginning of expansion.


Variable Costs
Costs of a production process that increase or decrease along with changes in level of production, as opposed to fixed costs.

Voluntary Export Restraint
Identical to an import quota except that the foreign market agrees voluntarily to limit exports from its county to a market.


When the relative value of a good is different from that goods marginal cost of production, waste occurs. Goods or resources are wasted when they are allocated to uses which are not the most valuable.

The value of the existing stock of goods; those goods may be tangible or intangible.

Wholesale Price Index
A measure of changes in the prices of goods at the wholesale level, particularly those goods sold between businesses.

Working Poor
Workers earning inadequate income as judged by government-established standards of poverty.

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