Economic Definitions
Appreciation: it is an increase in the value of an asset over time. The increase can occur for a number of reasons, including increased demand or weakening supply, or as a result of changes in inflation or interest rates.
Asset: An asset is a resource that has economic value and is owned or controlled by an individual, organization, or entity. Assets can be tangible or intangible and are typically acquired or developed to generate future benefits or returns.
Bankruptcy: it is a legal status that individuals or businesses can declare when they are unable to pay their debts. It is a formal process that is governed by specific laws and regulations in each country. When someone files for bankruptcy, it means they are seeking legal protection from their creditors and a resolution for their financial difficulties. The main purpose of bankruptcy is to provide individuals or businesses with a fresh start by either discharging their debts (eliminating the obligation to repay) or creating a structured repayment plan. The specifics of bankruptcy laws can vary depending on the jurisdiction, but the general concept remains the same.
Budget: It is a financial plan that outlines your expected income and expenses over a specific period. It serves as a roadmap for managing your money, ensuring that your income covers your necessary expenses, and helps you achieve your financial goals.
Budget Deficit: A budget deficit occurs when a government's expenditures exceed its revenue within a specific period, usually a fiscal year. It represents the shortfall between government spending and its tax revenue, and it is often financed through borrowing or the issuance of government bonds. A budget deficit leads to an increase in government debt.
Built-in Inflation: Built-in inflation refers to the inflationary expectations of individuals and businesses. If people expect prices to rise, they may demand higher wages, leading to increased production costs and a self-perpetuating cycle of inflation.
Business Cycle: It refers to the pattern of fluctuations in economic activity, characterized by alternating periods of expansion and contraction in an economy. It represents the ups and downs in the overall level of economic output, employment, and other macroeconomic indicators over time.
Capital: Capital generally refers to financial resources or assets that are available for investment or used in the production of goods or services. It represents wealth that can be used to generate income or support economic activities. Capital can take various forms, including money, physical assets, or even intellectual property.
Capital Investment: Adequate investment in physical capital, such as machinery, equipment, infrastructure, and technology, can enhance productive capacity. Capital accumulation allows for more efficient and larger-scale production, leading to increased output potential.
Central Bank: A central bank is a financial institution that is typically established by the government and entrusted with various key responsibilities related to monetary policy, currency issuance, banking supervision, and maintaining financial stability within a country.
Commercial Bank: A commercial bank is a financial institution that provides a wide range of banking services to individuals, businesses, and organizations. It serves as a crucial intermediary between savers and borrowers, facilitating the flow of funds within the economy.
Competition: It refers to the rivalry among firms operating in the same market or industry as they seek to attract customers and gain a larger market share. It is a fundamental concept in economics and plays a crucial role in shaping market dynamics and outcomes. In a competitive market, there are multiple buyers and sellers, and no individual firm has significant control over market conditions.
Consumer: a consumer is an individual or household that purchases goods and services to satisfy their personal needs and wants. Consumers play a central role in the functioning of markets and the overall economy. They are the demand side of the market, interacting with producers and suppliers who offer goods and services for sale. Consumers engage in the consumption process by making choices and decisions regarding what to buy, when to buy, and how much to buy. Their behavior is influenced by various factors, including their preferences, income, prices of goods and services, advertising and marketing efforts, and their own budget constraints.
Consumer Goods: Consumer goods are products and items that are purchased by individuals or households for personal use or consumption. These goods are intended to satisfy the needs, wants, and desires of consumers. Consumer goods can be broadly categorized into two main types: durable goods and non-durable goods.
Cost: It refers to the value or sacrifice incurred in the production or acquisition of goods, services, or resources. It represents the expenses or expenditures that a firm or individual must bear to produce or obtain something. Cost is a fundamental concept in economic analysis and is crucial for understanding production decisions, pricing strategies, and resource allocation.
Cost of Production: It refers to the total expenses incurred by a firm or producer in the process of manufacturing goods or providing services. It includes various elements that contribute to the overall cost of producing output. Understanding the cost of production is essential for businesses to make informed decisions about pricing, profitability, and resource allocation.
Cost-Push Inflation: Cost-push inflation is driven by increased production costs, such as higher wages, raw material prices, or taxes. When businesses face rising input costs, they pass on these costs to consumers by raising prices.
Credit: refers to the ability of a borrower to obtain goods, services, or money with the understanding that payment will be made at a later time. It involves a lender or creditor extending funds, assets, or resources to a borrower or debtor, who agrees to repay the borrowed amount in the future, typically with interest. Credit is based on trust and the expectation that the borrower will fulfill their repayment obligations according to the agreed-upon terms. It enables individuals, businesses, and governments to access funds or resources that they may not have immediately available. Credit can take various forms, including loans, lines of credit, credit cards, and trade credit.
Currency: It refers to a system of money that is widely accepted as a medium of exchange for goods, services, and financial transactions within a particular country or region. It is the physical or digital form of money that circulates in an economy and serves as a means of payment and a unit of account. Currencies are issued and regulated by central banks or monetary authorities of respective countries. They are typically represented by banknotes (paper currency) and coins, although digital forms of currency have become increasingly prevalent in recent years.
Debt: It refers to an obligation or financial liability owed by one party, known as the debtor or borrower, to another party, known as the creditor or lender. It arises when a borrower receives funds, assets, or services from the creditor and commits to repay the borrowed amount in the future, typically with interest or other agreed-upon terms.
Deficit: It a deficit refers to a negative difference or shortfall between two quantities, typically involving financial transactions or accounts. It commonly refers to a budget deficit or a trade deficit.
Demand-Pull Inflation: This occurs when the demand for goods and services exceeds the available supply, leading to upward pressure on prices. Increased consumer spending, government expenditure, or expansionary monetary policies can contribute to demand-pull inflation.
Depreciation: It refers to the decrease in the value of a physical asset over time due to wear and tear, obsolescence, or other factors. It is a concept used to account for the declining value of capital goods or durable assets used in the production of goods and services. Depreciation is an important aspect of calculating a firm's expenses and determining its net income. It is considered a non-cash expense because it does not involve an actual outflow of cash. Instead, it represents the allocation of the cost of an asset over its useful life.
Depression: It refers to a severe and prolonged downturn in economic activity characterized by a significant contraction in output, employment, and trade. It is an extreme form of recession, marked by a sustained period of economic decline and widespread economic hardship.
Economics: Economics is a social science that studies how individuals, businesses, governments, and societies allocate their scarce resources to satisfy their unlimited wants and needs. It examines the production, distribution, and consumption of goods and services, as well as the behavior and interactions of various economic agents.
Economic Development: It refers to the process by which an economy undergoes structural transformation, leading to sustained improvement in the well-being and living standards of its population. It encompasses various aspects, including economic growth, social progress, institutional development, and the reduction of poverty and inequality.
Economic Growth: It refers to the increase in the production and consumption of goods and services in an economy over time. It is typically measured by changes in the gross domestic product (GDP) or gross national product (GNP) of a country.
Economy: An economy refers to the system through which resources are produced, distributed, and consumed in a society. It encompasses the activities and interactions of individuals, businesses, and governments that collectively determine the production, allocation, and utilization of goods and services. In an economy, various economic agents such as households, firms, and the government participate in economic activities. These activities involve the production of goods and services, the exchange of goods and services through markets, the distribution of income and wealth, and the consumption of goods and services by individuals and households.
Explicit Costs: Explicit costs are tangible, out-of-pocket expenses that are actually paid for in monetary terms. These costs involve the payment of wages, rent, raw materials, utilities, taxes, and other expenses incurred in the production process. Explicit costs are recorded in accounting statements.
Externalities: Externalities occur when the production or consumption of a good or service affects third parties who are not involved in the transaction. Externalities can be positive (beneficial) or negative (harmful). For example, pollution from a factory imposes costs on the surrounding community, which is a negative externality. When externalities exist, market prices do not reflect the full social costs or benefits, leading to an inefficient allocation of resources.
Factors of Production: Factors of production are the resources or inputs that are used in the process of producing goods and services. They are the fundamental building blocks of economic production.
Fiscal Policy: Fiscal policy refers to the use of government spending and taxation to influence the overall state of the economy. It is one of the key tools that governments utilize to stabilize the economy, promote economic growth, and address various macroeconomic objectives. Governments enact fiscal policy by making decisions regarding their expenditures on public goods and services and by levying taxes on individuals, businesses, and other entities.
Fixed Costs: Fixed costs are costs that do not vary with the level of production or output. They remain constant regardless of the quantity produced. Examples include rent, loan repayments, insurance premiums, and salaries of permanent employees.
Structural Adjustments: It refers to a set of economic and policy reforms implemented by countries, often in collaboration with international financial institutions like the International Monetary Fund (IMF) and the World Bank, to address macroeconomic imbalances and promote sustainable economic growth. These adjustments typically involve significant changes in economic structures, institutions, and policies.
Taylor Rule: The Taylor Rule is a monetary policy guideline that provides a framework for central banks to determine the appropriate level of short-term interest rates in response to changes in economic conditions. It was developed by economist John B. Taylor in 1993 as a way to guide central banks in setting interest rates based on inflation and output conditions.
Total Cost: Total cost is the sum of both explicit and implicit costs. It includes all expenses incurred in the production process, including both monetary and non-monetary costs.
Time Preference: Time preference, also known as time discounting or time value of money, is a concept in economics that refers to individuals' preference for receiving a benefit or payment in the present rather than in the future. It reflects the idea that people generally value immediate satisfaction or benefits more than the same benefits received in the future.
Trade Deficit: A trade deficit arises when the value of a country's imports of goods and services exceeds the value of its exports. It represents a negative balance of trade and is often measured over a specific time period, such as a month, quarter, or year. A trade deficit implies that a country is buying more from other countries than it is selling, resulting in a net outflow of currency.
Variable Costs: Variable costs are costs that change in direct proportion to the level of production or output. They increase or decrease as the quantity produced changes. Examples include the cost of raw materials, direct labor, and utilities
Wealth: It refers to the abundance of valuable resources or assets owned by an individual, household, business, or nation. It represents the accumulated value of tangible and intangible assets that can be used or exchanged to generate future income or provide economic security.
Full Employment: Full employment is a situation in an economy where all or nearly all individuals who are willing and able to work at the prevailing wage rates are employed. In a fully employed economy, the level of unemployment is considered to be minimal and mainly consists of frictional or voluntary unemployment, where individuals are in the process of transitioning between jobs or seeking better employment opportunities.
Human Capital Development: The skills, knowledge, and education of the workforce contribute to productive capacity. Investment in human capital through education and training programs enhances productivity and enables individuals to contribute more effectively to economic production.
Income: It refers to the money or cash flow received by individuals, households, businesses, or other economic entities within a specific period. It represents the flow of earnings or resources that individuals and entities acquire through various sources.
Inflation: It refers to the sustained increase in the general price level of goods and services in an economy over a period of time. It means that, on average, prices are rising, and the purchasing power of money is decreasing.
Implicit Costs: Implicit costs are the opportunity costs associated with using self-owned resources or assets in production. They represent the value of resources that could have been used for alternative purposes but are foregone when utilized within the current production process. For example, if an entrepreneur decides to start their own business, the implicit cost would be the income they could have earned by working for someone else.
Interest: It refers to the cost or price of borrowing money or the return earned on lending or investing funds. It is a key concept in financial markets and plays a significant role in various economic activities.
Interest rate: An interest rate is a percentage that is charged or paid on a loan, investment, or other financial transaction. It represents the cost of borrowing money or the return earned on lending or investing funds. Interest rates are expressed as an annual percentage rate (APR) and are a fundamental component of financial markets and monetary policy. In the context of borrowing, an interest rate represents the cost that borrowers pay to lenders for using their funds. When individuals, businesses, or governments borrow money, they agree to repay the principal amount along with the interest charged over a specified period. The interest rate is typically determined by various factors, such as the creditworthiness of the borrower, the risk associated with the loan, prevailing market conditions, and monetary policy decisions.
Investment: It refers to the act of allocating resources, such as money, time, or effort, to acquire or create assets with the expectation of generating future income or returns. It involves sacrificing present consumption or resources in the hope of obtaining benefits or returns in the future.
Loan: It refers to the act of providing funds, typically in the form of money, to an individual, business, or government entity with the expectation that it will be repaid in the future, usually with interest. Loans are a common financial instrument used to finance various economic activities, investments, or consumption. Loans can be obtained from various sources, including banks, financial institutions, credit unions, and even individuals. The lender provides the loan amount, and the borrower agrees to repay the principal amount plus any applicable interest and fees over a specified period.
Manufactured Goods: It refers to a product that is created through a process of transforming raw materials or components using various manufacturing methods. These goods are typically produced on a large scale in factories or production facilities and undergo several stages of production before they are ready for use or consumption.
Marginal Utility: Marginal utility is a concept in economics that measures the additional satisfaction or utility a consumer derives from consuming one additional unit of a good or service. It represents the change in total utility resulting from a change in the quantity consumed.
Market: It refers to the interaction between buyers and sellers who engage in the exchange of goods, services, or resources. It is a system or mechanism through which individuals, businesses, and other economic agents come together to buy and sell products or services.
Market Failure: It refers to a situation in which the allocation of goods and services in a market is inefficient or suboptimal from a societal perspective. In other words, the market fails to achieve an optimal outcome in terms of resource allocation, distribution of goods, or overall welfare. Market failures can occur due to various reasons, including the presence of externalities, lack of competition, public goods, information asymmetry, and imperfect market conditions.
Monetary Inflation: Monetary inflation occurs when there is an excessive increase in the money supply relative to the available goods and services. If there is more money in circulation without a corresponding increase in production, it can drive up prices.
Monetary Policy: It refers to the actions and measures undertaken by a central bank or monetary authority to manage and control the money supply, interest rates, and credit conditions in an economy to achieve specific macroeconomic objectives.
Money Supply: The central bank has the authority to control the money supply in the economy. By increasing or decreasing the money supply, the central bank influences the availability of money for borrowing and spending, which has a direct impact on economic activity.
Open Market Operations: One of the primary tools of monetary policy is open market operations, where the central bank buys or sells government securities (bonds) in the open market. When the central bank buys government securities, it injects money into the economy, increasing the money supply. Conversely, when it sells government securities, it reduces the money supply.
Output: It refers to the total quantity or volume of goods and services produced in an economy over a given period, typically measured in monetary terms or physical units. It represents the result of the production process and is a key indicator of economic activity and performance.
Opportunity Cost: Opportunity cost refers to the value of the next best alternative foregone when making a decision. It represents the benefits or profits that could have been obtained from the next best alternative use of resources. For example, if a business chooses to invest its funds in Project A, the opportunity cost is the potential return it could have earned from investing in Project B.
Price Control: It refers to government regulations or policies that aim to restrict or regulate the prices of goods and services in the market. Price controls can take various forms, including price ceilings and price floors, and they are implemented for different reasons, such as stabilizing prices, protecting consumers, or addressing market failures.
Productive Capacity: Productive capacity, also known as productive potential or productive capability, refers to the maximum amount of goods and services that an economy or firm can produce given its available resources, technology, and existing production processes. It represents the upper limit of an economy's production capacity under ideal conditions.
Recession: It refers to a significant and widespread decline in economic activity over a sustained period. It is typically characterized by a contraction in gross domestic product (GDP), a decline in employment levels, reduced consumer spending, and a general slowdown in various economic indicators.
Scarcity: Scarcity is a fundamental concept in economics that refers to the condition of limited resources and unlimited wants and needs. It is the fundamental problem that arises from the imbalance between the availability of resources and the demand for those resources.