Macroeconomics
Average Propensity to Consume – the fraction of total income that households spend on consumption. It is calculated by dividing total consumption by total income. A higher APC indicates a greater tendency to spend rather than save, reflecting consumer behavior and economic conditions.
Average Propensity to Save – the fraction of total income that households save rather than spend. It is calculated by dividing total savings by total income. A higher APS indicates a greater tendency to save, reflecting consumer confidence and economic conditions.
Consumption Function – the relationship between total consumer spending and disposable income. It shows how changes in income levels influence consumer spending patterns. Typically, the function suggests that as income increases, consumption also increases, but not necessarily at the same rate.
Fisher Equation – explains how nominal interest rates reflect both real returns and expected inflation. It helps investors understand the true cost of borrowing and the real return on investments.
GDP (expenditure and income approaches) – the total value of all goods and services produced within a country’s borders over a specific period. It serves as an indicator of economic health, showing the size and performance of an economy. Higher GDP indicates a more productive economy.
GDP Deflator – a measure of price inflation for all goods and services included in GDP. It compares nominal GDP (measured in current prices) to real GDP (adjusted for inflation), providing insight into the overall level of price changes in the economy. A rising GDP deflator indicates increasing inflation.
GDP Growth Rate – the increase in a country’s economic output over a specific period, usually expressed as a percentage. It indicates the pace of economic expansion or contraction and is a key indicator of economic health. A higher growth rate signifies a thriving economy, while a negative rate indicates a recession.
Income Elasticity of Demand – how the quantity demanded of a good changes in response to a change in consumer income. It is calculated as the percentage change in quantity demanded divided by the percentage change in income. A higher elasticity indicates that demand for the good is more sensitive to income changes, often categorizing goods as normal or inferior.
Inflation Rate – the percentage increase in the general price level of goods and services in an economy over a specific period, usually annually. It indicates how much purchasing power is eroded due to rising prices. A moderate inflation rate is normal in a growing economy, while high inflation can signal economic instability.
Labor Force Participation Rate – the percentage of the working-age population that is either employed or actively seeking employment. It reflects the active segment of the labor market and can indicate economic health. A higher rate suggests more individuals are engaged in the workforce.
Labor Force – the total number of people who are employed or actively seeking employment within an economy. It includes both full-time and part-time workers but excludes those not seeking work, such as retirees and students. The labor force is a key component for assessing economic activity and workforce dynamics.
Marginal Propensity to Consume – the proportion of additional income that a household spends on consumption rather than saving. It is calculated by dividing the change in consumption by the change in income. A higher MPC indicates a greater tendency to spend any extra income, influencing overall economic activity.
Marginal Propensity to Import – the proportion of additional income that is spent on imported goods and services. It is calculated by dividing the change in imports by the change in income. A higher MPI indicates that as income increases, a larger share is spent on imports, affecting trade balances and economic policies.
Marginal Propensity to Save – the fraction of additional income that households save rather than spend. It is calculated by dividing the change in savings by the change in income. A higher MPS indicates a greater tendency to save, which can influence investment and economic growth.
Money Multiplier – the maximum amount of money that can be created in the banking system from each unit of reserves. It is calculated as the reciprocal of the reserve requirement ratio. A higher money multiplier indicates that banks can lend more, leading to an increase in the money supply and potentially stimulating economic activity.
National Savings – the total savings of a country, including private savings (from households and businesses) and public savings (from government surplus). It is a key indicator of a nation’s financial health and ability to invest in future growth. Higher national savings can lead to increased investment and economic stability.
Net Capital Outflow – the difference between the capital that residents of a country invest abroad and the capital that foreign investors invest in the country. A positive NCO indicates that more capital is leaving the country than entering, which can affect the exchange rate and overall economic conditions.
Net Exports – the value of a country’s total exports minus its total imports. It reflects the trade balance and indicates whether a country is a net exporter (exports greater than imports) or a net importer. Positive net exports contribute to economic growth, while negative net exports can signify reliance on foreign goods.
Public Savings – the savings accumulated by the government sector, calculated as the difference between government revenue (mainly from taxes) and government spending. Positive public savings indicate a government surplus, which can be used for investment or debt reduction, while negative public savings indicate a deficit.
Private Savings – the portion of income that households and businesses save rather than spend on consumption. It is calculated as total income minus consumption and taxes. Higher private savings can contribute to investment and economic growth by providing capital for businesses and reducing reliance on external financing.
Quantity Theory of Money (Money Supply, Velocity, Average Price Level, and Volume of Transactions) – an increase in the money supply leads to higher price levels if the output of goods and services remains constant. It emphasizes the link between money supply and inflation.
Real Exchange Rate – measures the value of a country’s currency relative to another, adjusted for price levels. It reflects the purchasing power of currencies and indicates competitiveness in international trade. A higher real exchange rate suggests that a country’s goods are more expensive compared to others.
Real GDP – the total value of all goods and services produced in an economy, adjusted for inflation. It reflects the true economic output and allows for comparison across different time periods by removing the effects of price changes. A higher real GDP indicates stronger economic performance.
Real Interest Rate – the nominal interest rate adjusted for inflation, reflecting the true cost of borrowing and the real return on savings. It is calculated by subtracting the inflation rate from the nominal interest rate. A higher real interest rate indicates greater purchasing power for savers and borrowers.
Savings Function – the relationship between disposable income and the amount of income that households save. It illustrates how changes in income levels influence savings behavior. Typically, as disposable income increases, savings also increase, but the rate of savings can vary based on individual or economic factors.
Spending Multiplier (Save and Consume) – measures the effect of an initial change in spending on overall economic output. It indicates how much total economic activity increases as a result of an initial increase in spending, reflecting the ripple effect through the economy. A higher multiplier suggests that each dollar of new spending generates a larger increase in economic activity.
Tax Multiplier (Simple and Complex) – measures the impact of a change in taxes on overall economic output. It reflects how changes in taxation influence consumer spending and, subsequently, aggregate demand. A negative multiplier indicates that a decrease in taxes leads to a greater increase in economic activity, while an increase in taxes results in a larger decrease in activity.
Unemployment Rate – the percentage of the labor force that is jobless and actively seeking employment. It is calculated by dividing the number of unemployed individuals by the total labor force. A higher unemployment rate indicates greater economic distress, while a lower rate suggests a healthier job market.
Microeconomics
Accounting Profit – the difference between total revenue and explicit costs (the direct, out-of-pocket expenses of running a business). It represents the net income reported on financial statements and is used for tax purposes. A higher accounting profit indicates better financial performance.
Average Cost – the total cost of production divided by the quantity of output produced. It reflects the per-unit cost of production, including both fixed and variable costs. A lower average cost indicates greater efficiency in production.
Average Fixed Cost – the total fixed costs divided by the quantity of output produced. It represents the fixed cost per unit of output and decreases as production increases. A lower average fixed cost indicates greater efficiency in spreading fixed costs over more units.
Average Variable Cost – the total variable costs divided by the quantity of output produced. It represents the variable cost per unit of output and typically decreases as production increases due to economies of scale. A lower average variable cost indicates more efficient production.
Average Revenue – the total revenue generated from sales divided by the quantity of goods sold. It represents the revenue earned per unit sold and is often equivalent to the price of the product in a competitive market. A higher average revenue indicates better pricing and sales performance.
Cross Price Elasticity of Demand – measures the responsiveness of the quantity demanded for one good when the price of another good changes. It is calculated as the percentage change in the quantity demanded of one good divided by the percentage change in the price of the other good. A positive cross price elasticity indicates that the goods are substitutes, while a negative value indicates they are complements.
Economic Profit – the difference between total revenue and total costs, including both explicit and implicit costs (opportunity costs). It reflects the true profitability of a business by considering the opportunity costs of all resources used. A positive economic profit indicates that a firm is generating more than the minimum required return on investment.
Elasticity – the responsiveness of one variable to changes in another variable. In economics, it commonly refers to how the quantity demanded or supplied of a good responds to changes in price (price elasticity), income (income elasticity), or the price of related goods (cross-price elasticity). A higher elasticity indicates a greater responsiveness to changes.
Marginal Cost – the additional cost incurred by producing one more unit of a good or service. It is calculated by the change in total cost divided by the change in quantity produced. Understanding marginal cost helps businesses make decisions about production levels and pricing strategies.
Marginal Product – the additional output generated from employing one more unit of a specific input, such as labor or capital, while keeping other inputs constant. It reflects the change in total production resulting from the incremental change in input use. A higher marginal product indicates greater efficiency in resource utilization.
Marginal Revenue – the additional revenue generated from selling one more unit of a good or service. It is calculated as the change in total revenue divided by the change in quantity sold. Understanding marginal revenue helps businesses determine optimal pricing and production levels.
Midpoint Elasticity – also known as arc elasticity, measures the elasticity of demand or supply between two points on a curve. It calculates the percentage change in quantity divided by the percentage change in price, using the average of the initial and final values for both quantity and price. This method provides a more accurate measure of elasticity over a range of prices and quantities.
Price Elasticity of Demand – measures the responsiveness of the quantity demanded of a good to changes in its price. It is calculated as the percentage change in quantity demanded divided by the percentage change in price. A higher elasticity indicates that consumers are more sensitive to price changes, while a lower elasticity suggests they are less responsive.
Price Elasticity of Supply – measures the responsiveness of the quantity supplied of a good to changes in its price. It is calculated as the percentage change in quantity supplied divided by the percentage change in price. A higher elasticity indicates that producers can quickly adjust their output in response to price changes, while a lower elasticity suggests a more rigid supply.
Profit (from total and average) – the financial gain that occurs when total revenue exceeds total costs. It can be calculated as total revenue minus total costs, which includes both explicit and implicit costs. Profit is a key indicator of business success and can be categorized as accounting profit or economic profit, with the latter considering opportunity costs.
Total Cost – the sum of all expenses incurred in the production of goods or services, including both fixed and variable costs. Fixed costs remain constant regardless of production levels, while variable costs change with the level of output. Understanding total cost is essential for pricing decisions and profit analysis.
Total Revenue – the total amount of money generated from sales of goods or services before any costs or expenses are deducted. It is calculated by multiplying the price per unit by the quantity sold. Total revenue is crucial for assessing a company’s financial performance and profitability.