Adam Smith (1723 – 1790)
Definition: Regarded as the father of modern Economics, Adam Smith authored “Wealth of Nations.”
Example: His work laid the foundation for classical economics.
Automatic stabilizers
Definition: Policies that automatically adjust spending or taxes to stabilize the economy during fluctuations.
Example: Unemployment benefits increase when unemployment rises, providing economic support without new legislation.
Aggregate monetary resources
Definition: Broad money excluding time deposits in post office savings organizations (M3).
Example: M3 includes cash and deposits in commercial banks but not long-term deposits in post offices.
Autonomous change
Definition: A change in a macroeconomic model caused by external factors.
Example: An unexpected technological breakthrough can lead to an autonomous change in productivity.
Autonomous expenditure multiplier
Definition: The ratio of the change in aggregate output or income to an autonomous change in spending.
Example: A government investment of 1 billion dollar that increases GDP by 3 billion dollar has a multiplier of 3.
Balance of payments
Definition: A summary of all transactions between a country and the rest of the world.
Example: The balance of payments includes exports, imports, foreign investments, and loans.
Balanced budget
Definition: A budget where government revenues equal expenditures.
Example: If a government plans to spend 500 billion dollar and expects to collect 500 dollar billion in taxes, it has a balanced budget.
Balanced budget multiplier
Definition: The change in equilibrium output resulting from an equal change in taxes and government spending.
Example: If both taxes and government spending increase by 100 million dollar, the overall GDP might increase by 100 million dollar.
Bank rate
Definition: The interest rate at which commercial banks borrow funds from the central bank.
Example: If the RBI sets the bank rate at 5%, commercial banks will pay 5% interest on borrowed reserves.
Barter exchange
Definition: The direct exchange of goods and services without using money.
Example: Trading a bushel of wheat for a gallon of milk is a barter exchange.
Base year
Definition: The year used as a reference point for calculating real GDP.
Example: If 2010 is the base year, GDP in subsequent years is measured against the price levels of 2010.
Bonds
Definition: Debt securities promising periodic interest payments and the return of principal at maturity.
Example: Government bonds pay interest annually and return the principal after ten years.
Broad money
Definition: The total money supply, including narrow money and time deposits.
Example: Broad money includes checking accounts, savings accounts, and certificates of deposit.
Capital
Definition: Produced goods used to produce other goods and not consumed in the production process.
Example: Machinery used in a factory is considered capital.
Capital gain/loss
Definition: The increase or decrease in the value of an asset over time.
Example: If a bond’s value rises from 1,000 dollar to 1,200 dollar, the owner has a capital gain of 200 dollar.
Capital goods
Definition: Goods used to produce other goods, not for immediate consumption.
Example: A company’s purchase of new factory equipment is an investment in capital goods.
Capitalist country or economy
Definition: An economy where production is primarily carried out by private firms.
Example: The United States is considered a capitalist economy due to its private sector-driven market.
Capitalist firms
Definition: Firms characterized by private ownership, production for the market, wage labor, and capital accumulation.
Example: A privately-owned tech company operating in a competitive market.
Cash Reserve Ratio (CRR)
Definition: The percentage of deposits banks must hold as reserves with the central bank.
Example: If the CRR is 4%, banks must hold 4 dollar as reserves for every 100 dollar in deposits.
Circular flow of income
Definition: The continuous movement of income between producers and consumers.
Example: Households earn income from businesses and spend it on goods and services, creating a circular flow.
Consumer durables
Definition: Long-lasting goods consumed over time.
Example: Refrigerators and cars are consumer durables.
Consumer Price Index (CPI)
Definition: The measure of the average change in prices of a basket of consumer goods and services.
Example: The CPI indicates inflation by comparing current prices to those in the base year.
Consumption goods
Definition: Goods used by consumers to satisfy immediate needs.
Example: Food, clothing, and personal care items are consumption goods.
Corporate tax
Definition: Taxes on the income of corporations.
Example: A company earning 1 million dollar in profit might pay a 25% corporate tax, amounting to 250,000 dollar.
Currency deposit ratio
Definition: The ratio of currency held by the public to deposits in commercial banks.
Example: If the public holds 1,000 dollar in cash and 4,000 dollar in deposits, the ratio is 1:4.
Deficit financing through central bank borrowing
Definition: Financing a budget deficit by borrowing from the central bank, increasing the money supply and potentially causing inflation.
Example: The government borrows $1 billion from the central bank to fund public projects, leading to increased money circulation.
Depreciation (currency)
Definition: A decrease in the value of domestic currency relative to foreign currency under floating exchange rates.
Example: If the exchange rate of 1 USD increases from 70 to 75 INR, the INR has depreciated.
Depreciation (capital)
Definition: The reduction in value of capital stock due to wear and tear over time.
Example: Machinery losing value each year due to usage and aging.
Devaluation
Definition: The intentional reduction in the value of a country’s currency under a fixed exchange rate system.
Example: A government lowers its currency’s value from 10 to 12 units per USD to boost exports.
Double coincidence of wants
Definition: A situation where two parties each possess something the other wants, facilitating an exchange.
Example: A farmer with surplus wheat trades with a tailor who has surplus clothes.
Economic agents or units
Definition: Individuals or institutions that make economic decisions.
Example: Consumers, firms, and government bodies are economic agents.
Effective demand principle
Definition: Aggregate output is determined solely by aggregate demand if the supply of final goods is infinitely elastic at a constant price in the short term.
Example: During a recession, increased government spending can raise aggregate demand and output.
Entrepreneurship
Definition: The act of organizing, coordinating, and taking risks in the production process.
Example: Starting a new tech company involves entrepreneurship.
Ex ante consumption
Definition: The planned value of consumption.
Example: Households plan to spend $5,000 on consumption this month.
Ex ante investment
Definition: The planned value of investment.
Example: A firm plans to invest $2 million in new equipment next year.
Ex ante
Definition: The planned value of a variable, as opposed to its actual value.
Example: A company’s budget includes an ex ante profit projection of $1 million.
Ex post
Definition: The actual or realized value of a variable, as opposed to its planned value.
Example: The ex post profit for the year was $800,000, lower than the planned amount.
Expenditure method of calculating national income
Definition: Calculating national income by summing up the total expenditure on final goods and services produced within an economy over a period.
Example: Adding up consumer spending, investment, government spending, and net exports.
Exports
Definition: The sale of goods and services by a country to other countries.
Example: Japan exports cars to the United States.
External sector
Definition: The part of an economy involved in transactions with the rest of the world.
Example: Trade, foreign investment, and remittances are part of the external sector.
Externalities
Definition: Unintended benefits or harms from an economic activity affecting others who do not pay for the benefit or are not compensated for the harm.
Example: Pollution from a factory harming nearby residents is a negative externality.
Fiat money
Definition: Money that has no intrinsic value but is accepted as currency by government decree.
Example: Modern paper currency and coins.
Final goods
Definition: Goods that are ready for consumption and do not require further processing.
Example: A smartphone sold to a consumer.
Firms
Definition: Economic units that produce goods and services and employ factors of production.
Example: A manufacturing company producing electronics.
Fiscal policy
Definition: Government policy regarding spending, transfers, and taxation.
Example: The government increases spending on infrastructure to stimulate economic growth.
Fixed exchange rate
Definition: An exchange rate set and maintained at a fixed level by a country’s government or central bank.
Example: The Hong Kong dollar is pegged to the US dollar at a fixed rate.
Flexible/floating exchange rate
Definition: An exchange rate determined by supply and demand in the foreign exchange market without central bank intervention.
Example: The value of the US dollar against the euro fluctuates based on market forces.
Flows
Definition: Economic variables measured over a period of time.
Example: Monthly income and expenditure are flow variables.
Foreign exchange
Definition: Currency from other countries.
Example: US dollars are foreign exchange in Europe.
Foreign exchange reserves
Definition: Assets held by a central bank in foreign currencies.
Example: India’s foreign exchange reserves include US dollars, euros, and other foreign currencies.
Four factors of production
Definition: Land, labor, capital, and entrepreneurship used in producing goods and services.
Example: A farm (land), workers (labor), tractors (capital), and a farmer managing the operation (entrepreneurship).
GDP Deflator
Definition: The ratio of nominal GDP to real GDP, used to measure inflation.
Example: If nominal GDP is 1 trillion dollar and real GDP is 900 billion dollar, the GDP deflator is 1.11.
Government expenditure multiplier
Definition: The increase in aggregate output resulting from an increase in government spending.
Example: A 100 million dollar increase in government spending results in a 150 million dollar increase in GDP, indicating a multiplier of 1.5.
Government
Definition: The institution that maintains law and order, imposes taxes, and promotes economic welfare.
Example: The government enacts policies to ensure economic stability and growth.
Great Depression
Definition: The severe worldwide economic downturn during the 1930s, beginning with the 1929 stock market crash.
Example: The US saw unemployment rates soar to 25% during the Great Depression.
Gross Domestic Product (GDP)
Definition: The total value of goods and services produced within a country’s borders, including replacement investment.
Example: The GDP of Japan includes all goods and services produced domestically in a given year.
Gross fiscal deficit
Definition: The excess of total government expenditure over revenue receipts and non-debt-creating capital receipts.
Example: If a government spends 500 billion dollar but only collects 400 billion dollar in revenue, the gross fiscal deficit is 100 billion dollar.
Gross investment
Definition: Total addition to capital stock, including replacements for wear and tear.
Example: A company spends 10 million dollar on new equipment and 2 million dollar on maintenance, totaling 12 million dollar in gross investment.
Gross National Product (GNP)
Definition: GDP plus net income from abroad, representing the total income earned by a country’s residents.
Example: US GNP includes income earned by American businesses overseas but excludes income earned by foreign businesses in the US.
Gross primary deficit
Definition: The fiscal deficit excluding interest payments.
Example: If the fiscal deficit is 200 billion dollar and interest payments are 50 billion dollar, the gross primary deficit is 150 billion dollar.
High powered money
Definition: Currency issued by the central bank, forming the base of the money supply.
Example: The central bank issues $1 billion in high powered money to commercial banks.
Households
Definition: Families or individuals who supply labor and consume goods and services.
Example: A household earns income from wages and spends it on food, housing, and other needs.
Imports
Definition: Goods and services purchased by a country from abroad.
Example: The US imports electronics from China.
Income method of calculating national income
Definition: Measuring national income by summing up all factor payments, such as wages and profits, over a period.
Example: Calculating national income by adding up all salaries, rents, interests, and profits earned within a year.
Interest
Definition: Payment for the use of borrowed capital.
Example: A bank charges 5% interest annually on a loan.
Intermediate goods
Definition: Goods used up during the production process of other goods.
Example: Steel used in car manufacturing is an intermediate good.
Inventories
Definition: Unsold goods, unused raw materials, or semi-finished goods carried over to the next year.
Example: A furniture company holds unsold chairs as part of its inventory.
John Maynard Keynes (1883 – 1946)
Definition: A key figure in the foundation of Macroeconomics as a separate discipline.
Example: Keynes’ theories on government intervention in the economy are central to modern macroeconomics.
Labor
Definition: Human physical and mental effort used in production.
Example: Factory workers and software developers contribute labor to their respective industries.
Land
Definition: Natural resources used in production, either fixed or consumed.
Example: Agricultural land and mineral deposits are forms of land in economics.
Legal tender
Definition: Money issued by the government or monetary authority that must be accepted for payment.
Example: US dollar bills are legal tender in the United States.
Lender of last resort
Definition: The role of the monetary authority to ensure the solvency of commercial banks during liquidity crises.
Example: The Federal Reserve provides emergency funding to banks in times of financial distress.
Liquidity trap
Definition: A situation with very low interest rates where people expect rates to rise, leading them to hold onto cash rather than bonds.
Example: During a liquidity trap, even with low interest rates, people save rather than invest, fearing future losses.
Macroeconomic model
Definition: A simplified representation of the functioning of a macroeconomy using analytical, mathematical, or graphical methods.
Example: The IS-LM model represents the interaction between interest rates and real output.
Managed floating
Definition: An exchange rate system where the central bank occasionally intervenes to influence the rate while generally allowing market forces to determine it.
Example: China’s central bank manages the yuan’s exchange rate within a certain range.
Marginal propensity to consume
Definition: The ratio of additional consumption to additional income.
Example: If a person spends $0.80 of every additional dollar earned, their marginal propensity to consume is 0.8.
Medium of exchange
Definition: The primary function of money, facilitating the exchange of goods and services.
Example: Using cash to buy groceries.
Money multiplier
Definition: The ratio of total money supply to the stock of high powered money in an economy.
Example: If the money multiplier is 4, then 1 dollar of high powered money creates 4 dollar in total money supply.
Narrow money
Definition: Currency notes, coins, and demand deposits held by the public in commercial banks.
Example: Cash and checking account balances constitute narrow money.
National disposable income
Definition: Net National Product at market prices plus other current transfers from the rest of the world.
Example: The total income available for a country to spend after accounting for transfers.
Net Domestic Product (NDP)
Definition: The total value of goods and services produced within a country, excluding depreciation of capital stock.
Example: NDP is GDP minus depreciation.
Net interest payments made by households
Definition: The difference between interest payments made by households to firms and interest payments received by households.
Example: If households pay 1,000 dollar in interest and receive 200 dollar, the net interest payment is 800 dollar.
Net investment
Definition: Addition to capital stock, excluding replacements for depleted capital stock.
Example: A company’s purchase of new machinery after accounting for replacements.
Net National Product (NNP) at market price
Definition: Gross National Product minus depreciation.
Example: If GNP is 1 trillion dollar and depreciation is 100 billion dollar, NNP is 900 billion dollar.
NNP at factor cost or National Income (NI)
Definition: NNP at market price minus indirect taxes plus subsidies.
Example: If NNP is 900 billion dollar, indirect taxes are 50 billion dollar, and subsidies are 10 billion dollar, NI is 860 billion dollar.
Nominal exchange rate
Definition: The number of units of domestic currency required to purchase one unit of foreign currency.
Example: If 1 USD costs 75 INR, the nominal exchange rate is 75 INR per USD.
Nominal GDP
Definition: GDP evaluated at current market prices.
Example: If a country’s GDP is $1 trillion at current prices, this is its nominal GDP.
Non-tax payments
Definition: Payments made by households to firms or the government that are not taxes, such as fines.
Example: A household pays a parking fine to the local government.
Open market operation
Definition: The central bank’s purchase or sale of government securities in the bond market to adjust the money supply.
Example: The Federal Reserve buys government bonds to increase the money supply.
Paradox of thrift
Definition: When individuals save more during economic downturns, leading to reduced aggregate savings because of decreased overall spending.
Example: During a recession, increased savings by individuals can lead to lower overall economic activity and savings.
Parametric shift
Definition: A shift in a graph due to a change in the value of a parameter.
Example: An increase in consumer income shifts the demand curve to the right.
Personal Disposable Income (PDI)
Definition: Personal Income minus personal tax payments and non-tax payments.
Example: If an individual’s personal income is 50,000 dollar, taxes are 10,000 dollar, and fines are 500 dollar, then PDI is 39,500 dollar.
Personal Income (PI)
Definition: National Income minus undistributed profits, net interest payments made by households, and corporate tax plus transfer payments to households from the government and firms.
Example: If National Income is 100 billion dollar, and the adjustments amount to 20 billion dollar, then PI is 80 billion dollar.
Personal tax payments
Definition: Taxes imposed on individuals, such as income tax.
Example: An individual pays 20% of their salary as income tax.
Planned change in inventories
Definition: A change in the stock of inventories that has been planned.
Example: A company plans to increase its inventory of raw materials by 10% to prepare for higher future demand.
Present value (of a bond)
Definition: The amount of money that, if invested today, would generate the same income as the bond over its lifetime.
Example: If a bond promises 1,000 dollar in a year and the interest rate is 5%, its present value is 952.38 dollar.
Private income
Definition: Factor income from net domestic product accruing to the private sector plus national debt interest, net factor income from abroad, current transfers from government, and other net transfers from the rest of the world.
Example: Private income includes salaries, interest from national debt, and remittances.
Product method of calculating national income
Definition: Calculating national income by measuring the aggregate value of production in an economy over a period.
Example: Summing up the value of all goods and services produced in a year.
Profit
Definition: Payment for the services provided by entrepreneurship.
Example: An entrepreneur earns profit from a successful business venture.
Public good
Definition: Goods or services that are collectively consumed, where one person’s consumption does not reduce availability for others, and it is not possible to exclude anyone from their benefits.
Example: Street lighting is a public good.
Purchasing power parity
Definition: A theory that holds that the price of similar goods in different countries should be the same when measured in a common currency.
Example: If a basket of goods costs $100 in the US, it should cost the equivalent in euros in Europe under PPP.
Real exchange rate
Definition: The relative price of foreign goods in terms of domestic goods.
Example: If a foreign car costs 20,000 dollar in the US and a domestic car costs 25,000 dollar, the real exchange rate reflects this price comparison.
Real GDP
Definition: GDP evaluated at constant prices to remove the effect of inflation.
Example: Comparing GDP over different years using 2010 prices.
Rent
Definition: Payment for the use of land or natural resources.
Example: A farmer pays rent to use land for agriculture.
Reserve deposit ratio
Definition: The fraction of total deposits that commercial banks are required to keep as reserves.
Example: If the reserve ratio is 10%, banks must keep 10 dollar as reserves for every 100 dollar deposited.
Revaluation
Definition: An official increase in the value of a currency in a fixed exchange rate system, making foreign currency cheaper in terms of domestic currency.
Example: If the government raises the value of its currency from 5 to 4 units per USD, it has revalued the currency.
Revenue deficit
Definition: The excess of revenue expenditure over revenue receipts.
Example: If a government’s revenue expenditure is 200 billion dollar and revenue receipts are 180 billion dollar, the revenue deficit is 20 billion dollar.
Ricardian equivalence
Definition: The theory that consumers anticipate future tax increases due to government borrowing and adjust their consumption accordingly, making current borrowing equivalent to a tax increase.
Example: If the government borrows $1 billion, people might save more, expecting future taxes to repay the debt.
Speculative demand
Definition: Demand for money as a store of wealth.
Example: Investors hold cash instead of bonds when they expect bond prices to fall.
Statutory Liquidity Ratio (SLR)
Definition: The fraction of total demand and time deposits that commercial banks must hold in specified liquid assets.
Example: If the SLR is 20%, banks must invest 20% of their deposits in government securities.
Sterilization
Definition: Central bank actions to offset the impact of foreign exchange inflows on the money supply.
Example: The central bank sells government bonds to counteract the money supply increase from foreign currency purchases.
Stocks
Definition: Economic variables measured at a specific point in time.
Example: The value of inventory held by a company on December 31st.
Store of value
Definition: The function of money to preserve wealth for future use.
Example: Saving money in a bank account to use it later.
Transaction demand
Definition: Demand for money to facilitate transactions.
Example: Holding cash to pay for daily expenses.
Transfer payments to households from the government and firms
Definition: Payments made without any goods or services received in return, such as gifts, scholarships, and pensions.
Example: A pension paid to a retired worker.
Undistributed profits
Definition: Profits retained by firms and not distributed to shareholders or other stakeholders.
Example: A company reinvests its profits into business expansion instead of paying dividends.
Unemployment rate
Definition: The percentage of the labor force that is unemployed and actively seeking work.
Example: If 5 out of 100 people in the labor force are jobless and looking for work, the unemployment rate is 5%.
Unit of account
Definition: The function of money to measure and compare the value of different goods and services.
Example: Pricing a car at 20,000 dollar and a laptop at 1,000 dollar using dollars as the unit of account.
Unplanned change in inventories
Definition: An unexpected change in the stock of inventories.
Example: A sudden drop in sales leads to higher-than-expected inventory levels.
Value added
Definition: The net contribution of a firm to production, calculated as the value of production minus the value of intermediate goods used.
Example: If a bakery sells cakes for 1,000 dollar and uses 400 dollar worth of ingredients, the value added is 600 dollar.
Wage
Definition: Payment for labor services.
Example: A factory worker earns an hourly wage of $15.
Wholesale Price Index (WPI)
Definition: The percentage change in the average price of a basket of wholesale goods.
Example: An increase in the WPI indicates rising prices for goods sold in bulk, such as grains and metals.