Economics Terms We All Should Know

economics termsI’ll admit, sometimes when I read articles on the web that involve commonly used economics terms that I don’t know, I tend to be really hard on myself.  I should know these by now! So I looked up some of the most commonly used (but not quite understood) economics terms and listed them below (special thanks to Economist.com!).  Learning economics basics should be on everyone’s to-do list! It’s on mine! Enjoy.

Absolute advantage

This is the simplest way to determine economic performance. If one person, firm or country can produce more of something with the same amount of effort and resources, they have an absolute advantage over other producers. Being the best at something does not mean that doing that thing is the best way to use your scarce economic resources. The question of what to specialize in–and how to maximize the benefits from international trade–is best decided according to comparative advantage. Both absolute and comparative advantage may change significantly over time.

Amortization

The running down or payment of a loan by installments. An example is a repayment mortgage on a house, which is amortized by making monthly payments that over a pre-agreed period of time cover the value of the loan plus interest. With loans that are not amortized, the borrower pays only interest during the period of the loan and then repays the sum borrowed in full.

Antitrust

Antitrust signifies government policy for dealing with a monopoly. Antitrust laws aim to stop abuses of market power by big companies and, sometimes, to prevent corporate mergers and acquisitions that would create or strengthen a monopolist. There have been big differences in antitrust policies both among countries and within the same country over time. This has reflected different ideas about what constitutes a monopoly and, where there is one, what sorts of behavior are abusive.

Demand

One of the two words economists use most; the other is supply. These are the twin driving forces of the market economy. Demand is not just about measuring what people want; for economists, it refers to the amount of a good or service that people are both willing and able to buy. The demand curve measures the relationship between the price of a good and the amount of it demanded. Usually, as the price rises, fewer people are willing and able to buy it; in other words, demand falls. When demand changes, economists explain this in one of two ways. A movement along the demand curve occurs when a price change alters the quantity demanded; but if the price were to go back to where it was before, so would the amount demanded. A shift in the demand curve occurs when the amount demanded would be different from what it was previously at any chosen price, for example, if there is no change in the market price, but demand rises or falls. The slope of the demand curve indicates the elasticity of demand.

Policymakers seek to manipulate aggregate demand to keep the economy growing as fast as is possible without pushing up inflation. Keynesians try to manage demand through fiscal policy; monetarists prefer to use the money supply.

Supply

One of the two words economists use most, along with demand. These are the twin driving forces of the market economy. Supply is the amount of a good or service available at any particular price. The law of supply is that, other things remaining the same, the quantity supplied will increase as the price increases. The actual amount supplied will be determined, ultimately, by what the market price is, which depends on the amount demanded as well as what suppliers are willing to produce. What suppliers are willing to supply depends on several things, such as the cost of the factors of production, technology, the price of other goods and services (which, if high enough, might tempt the supplier to switch production to those products), and the ability of the supplier accurately to forecast demand and plan production to make the most of the opportunity.

Dividend

The part of a company’s profit distributed to shareholders. Unlike interest on debt, the payment of a dividend is not automatic. It is decided by the company’s managers, subject to the approval of the company’s owners (shareholders). However, when a company cuts its dividend, this usually triggers a sharp fall in its share price by more than would be appear to be justified by the reduced dividend. Economists theorize that this is because a dividend cut signals to shareholders that the company is in a bad way, with more bad news to follow.

Managerial Economics can be found here!

Macroeconomics

This involves the big picture: analyzing economy-wide phenomena such as growth, inflation and unemployment. Contrast with microeconomics, the study of the behavior of individual markets, workers, households and firms. Although economists generally separate themselves into distinct macro and micro camps, macroeconomic phenomena are the product of all the microeconomic activity in an economy. The precise relationship between macro and micro is not particularly well understood, which has often made it difficult for a government to deliver well-run macroeconomic policy.

Microeconomics

The study of the individual pieces that together make an economy. Contrast with macroeconomics, the study of economy-wide phenomena such as growth, inflation and unemployment. Microeconomics considers issues such as how households reach decisions about consumption and saving, how firms set a price for their output, whether privatization improves efficiency, whether a particular market has enough competition in it and how the market for labor works.

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Most-favored nation

Equal treatment, at least, in international trade. If country A grants country B the status of most-favored nation, it means that B’s exports will face tariff that are no higher (and also no lower) than those applied to any other country that A calls a most-favored nation. This will be the most favorable tariff treatment available to imports.

Most-favored nation treatment is one of the most important building blocks of the international trading system. The World Trade Organization requires member countries to accord the most favorable tariff and regulatory treatment given to the product of any one member to the ‘like products’ of all other members. Before the general agreement on tariffs and trade, there was often a most-favored nation clause in bilateral trade agreements, which helped the world move towards free trade. In the 1930s, however, there was a backlash against this, and most-favored nations were treated less favorably. This shift pushed the world economy towards division into regional trade areas. In the United States, most-favored nation status has to be re-ratified periodically by Congress.

World Trade Organization

The World Trade Organization is the governing body of international trade, setting and enforcing the rules of trade and punishing offenders. Established during the Uruguay Round of talks under the General Agreement on Tariffs and Trade (GATT), it opened for business in 1995 with a membership of 132 countries (rising to 146 by 2003). Countries used to break GATT rules with impunity. They seem to be finding it harder to do so under the WTO. Even so, protestors complain that it does not promote fair trade but does promote the interest of rich countries over poorer one. Supporters of free trade, including The Economist, reckon that all countries are better off as part of a well-regulated international trading system, and that the WTO is the most likely source of the good regulation that is needed.

World Bank

An institution created with the IMF at Bretton Woods in 1944 and opened in 1946. The World Bank has three main branches: the International Bank for Reconstruction and Development (IBRD), the International Development Agency (IDA) and the International Finance Corporation (IFC). Collectively, it aims to promote economic development in the world’s poorer countries through advice and long-term lending, averaging $30 ­billion a year, spread around 100 countries.

Critics of the World Bank say that it often worsens the problems facing developing countries. Its advice has often been guided by economic fashion, which led it to support a centrally planned brand of development economics in the 1960s and 1970s, before switching to privatization and structural adjustment in the 1980s and then to promoting democracy and economic transparency, and attacking crony capitalism, in the late 1990s. Until recently, it has generally supported big, ­high-profile projects rather than more economically useful smaller schemes. It has often failed to ensure that its loans have been spent on the intended project. Its willingness to pump money into struggling countries creates a potential moral hazard, in which politicians may have little incentive to govern well because they believe that, if they do a bad job, the World Bank will come to the rescue. The increase in private-sector lending to and investment in emerging markets has led to growing discussion of whether the World Bank is any longer needed.

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