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The process of mobilizing, transforming, and exploiting the inputs required in capitalist production and then selling the output; profit making and investment lie at the heart of the capitalist accumulation process.

Absolute Advantage

The ability of one country to produce a product at a lower cost than another country.

Aggregate Demand (AD )

The total demand for goods and services during some period of time, for instance, a year

Aggregate Supply

(AS )

The total supply of goods and services produced during some period of time.


Balance of payments 

The record of a country's transactions in goods, services, and assets with the rest of the world; also the record of a country's sources (supply) and uses (demand) of foreign exchange.

Balance of trade

A countries exports of goods and services minus its imports of goods and services.

Barriers to entry

Obstacles that make it more difficult or costly for new firms to enter a market; examples include technical secrets, initial investments that are very large, and exclusive marketing arrangements.

Bretton Woods

The New Hampshire location of a 1944 international meeting of treasury and bank officials of the Allied countries. The meeting designed the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development. It also led indirectly to the creation of the General Agreement on Tariffs and Trade (GATT).

Business Cycle

Describes the periodic expansion and contraction of output and employment taking place over a period of a few years. Contractions or recessions are periods of increased unemployment and reduction in output and income. Expansions are characterized by increases in employment and income.


Capital goods

Goods needed in production -- machines, buildings and the like -- but that are durable, and will be used up only over the course of years. Items that can be used to create wealth or other goods.

Capital flight

The tendency of both human capital and financial capital to leave developing countries in search of higher rates of return elsewhere.


The political-economic system based on private property and profit, in which commodities are produced for profit using privately owned capital goods and wage labor; capitalists obtain the surplus product in the form of profits.

Ceteris Paribus

"All else equal." A device used to analyze the relationship between two variables while the values of other variables are held unchanged.

Circular flowing market system

The flow of labor and resources from households to firms and the flow of products and wages from firms to households.


The control of one power over a dependent area of people. Implies formal political structure of control over one power over others.

Command economy

A society in which a central authority or government establishes the rules of economic behavior and decision making and usually owns the means of production.


An economic system in which the people control the means of production (capital and land) directly, without intervention of a government or state.


Any good or service that is produced with the intention of selling it in order to make a profit.

Comparative Advantage

The advantage that one country has over another in the production of a product, when that product can be produced at a lower costs in terms of other goods in that country. Everyone is better off when trade occurs (specialization). Trade could take place within own community but is better at an international level, leading to expansion/globalization.


Refers to aspects of economic relationships in which voluntary exchange and choice play the predominant role.

Competitive markets

Those markets with many potential demanders and suppliers.

Constant returns to scale

As outputs double, total costs double, but the cost per unit of output remains unchanged.

Consumer Price Index (CPI)

A measure of the average prices with a typical family pays for the goods and services it buys.

Corn Laws

The tariffs, subsidies, and restrictions enacted by the British Parliament in the early nineteenth century to discourage imports and encourage exports of grain.


A form of business organization resting on a legal charter that establishes the corporation as an entity from its owners. Owners hold shares and are liable for the firm's debts only up to the limit of their investment, or share, in the firm.

Crowding out

Occurs when spending by the government has the effect of reducing spending by families and businesses.


Declining Marginal Productivity (increasing marginal cost)

Declining marginal productivity (or increasing marginal costs) occurs when there is a fall in additional output produced (or an increase in additional cost) with a per unit increase in a specific input.

Deficit spending

When the government spends money borrowed from the public.


A decrease in the overall price level.

Demand curve

Indicates, for each possible price, how much of a good or service demanders are willing and able to buy.

Demand and Supply

Demand is the quantity of a good that buyers would like to purchase during a given period at a given price in a competitive market economy. Supply is the quantity of a good that sellers would like to sell during a given period at a given price. Equilibrium in the market is reached when supply equals demand.


The cost (due to wear and tear) of restoring the capital goods used up in producing last year's output.


A prolonged and deep recession.

Diminishing Marginal Utility

Diminishing marginal utility is a reduction in the additional satisfaction created from the consumption or use of one more unit of something.

Diseconomies of scale

Diminishing marginal returns to scale that occur when a firm becomes too large to manage and operate efficiently.


A firm or industry sells products on the world market at prices below the cost of production.


Ecological Footprint

A new term and process to assess our impact on the environment. It is quantified by what we have withdrawn from the environment (pulling resources out to make steel, clothing, etc.) and what we have put back (waste). Using these factors scientists are beginning to measure the amount of land and water we use and the certain amount of space we need for waste.

Economic growth

An increase in the total output of an economy. It occurs when a society acquires new resources or when it learns to produce more using existing resources.

Economic integration

The ultimate form of regional integration. It involves removing all barriers to interbloc movement of merchandise and factors of production, and unifying the social and economic policies of member nations. All members are subject to the binding decisions of a supranational authority consisting of executive, judicial, and legislative branches.

Economic liberalism

Sometimes used as a synonym for capitalism.

Economies of scale

Exist when it is more efficient to produce large quantities of some item than small quantities.


The condition in which the economy is producing what people want at the least possible cost.

Environmental sustainability

The level of the environment for which renewable resources can resupply and, therefore, sustain themselves in a steady rate.


Refers to a situation -- a price and quantity exchanged, or a level of employment and of aggregate demand -- in which there are no forces tending to change the situation other than accidental ones or ones coming from external sources.


The major form of Eurocurrency.


Any dollars deposited outside a U.S. bank.

European Economic Community (EEC)

A common market established in 1958 on the basis of a treaty signed in Rome in 1957, consisting of Belgium, the Netherlands, Luxembourg, Germany, France, & Italy. Forerunner of the European Union (EU).

European free-trade association

Free trade area established in 1960 in response to the EEC for the purposes of trade, aiming to abolish tariffs on imports of goods originating in the group. Formed a looser association than EFTA. The original members were Britain, Norway, Sweden, Denmark, Portugal, Austria, and Switzerland. Finland joined as an associate member in 1961. Iceland joined in 1970. Britain and Denmark left the free-trade area in 1973 upon joining the EEC.

European Union (EU)

The European trading bloc composed of Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden, and the United Kingdom.

Exchange rate

The value of the U.S. dollar compared with foreign currency


A cost or benefit resulting from some activity/transaction as the result of outside activity. Externalities are also known as spillovers or neighborhood effects.


Factor of production

One of the economic inputs -- land, labor, capital, entrepreneurship, technology -- essential to a production effort.


A form of government intervention in the economy in which an authoritarian government uses its power to limit workers' demands.

Federal Open Market Committee (FOMC)

A group composed of seven members of the Fed's Board of Governors, the president of the New York Federal Reserve Bank, and four of the other eleven district bank presidents on a rotating basis. It sets goals regarding the money supply and interest rates and directs the operation of the Open Market Desk in New York.

Federal Reserve System (The Fed)

The central bank of the United States.

Federal Trade Commission (FTC)

A federal regulatory group created by Congress in 1914 to investigate the structure and behavior of firms engaging in interstate commerce, to determine what constitutes unlawful "unfair" behavior, and to issue cease-and-desist orders to those found in violation of antitrust law.

Fiscal policy

Government policy of using taxes and spending to regulate the level of total output and employment.

Floating, or market determined, exchange rates

Exchange rates that are determined by the unregulated forces of supply and demand.

Foreign Direct Investment

Investing in companies in a foreign country, with the purpose of managerial and production control.

Foreign Exchange Rate

The amount of foreign currency that a dollar will buy; it is also known as the value of the dollar.

Free-rider problem

A problem intrinsic to public goods: Because people can enjoy the benefits of public goods whether they pay for them or not, they are usually unwilling to pay for them.

Full employment

A situation in which "in theory" almost everyone seeking work readily finds it, in other words, there is a only the "natural rate of unemployment." Neoclassical theory puts the natural rate of unemployment level at around 6%, but the recent performance of the economy has shown that this level can be as low as 4% unemployment. This does not include things such as discouraged workers, stay at home moms, and underground jobs.



The General Agreement on Tariffs and Trade, signed in 1947, is an international agreement between the US and 22 other countries that aims at promoting the liberalization of foreign trade, and is supportive of efforts to reduce barriers to international trade. It is headquarterered in Geneva, Switzerland.


Gross Domestic Product is the total market value of all final goods and services that were produced during a given period by factors of production located within a country.


Gross National Product is the total market value of all final goods and services that have been produced during a given period by factors of production owned by a country's citizens, irrespective of where the output is actually produced.

Government transfer payments

Cash payments made by the government directly to households for which no current services are received in return. They include social security benefits, unemployment compensation, and welfare payments.


Human Capital

The skills and knowledge that workers possess through education and training that yield valuable services to a firm over time.

Human Development Index (HDI)

Life expectancy, literacy rate, and per capita purchasing power.

Human Progress Index (HPI)

An alternative indicator to human progress by the United Nations Development Program.. It is measured on the scale 0 to 1 and is an combination of three indicators: longevity which is measured by life expectancy at birth, knowledge which is measured by adult literacy and the mean years of schooling, and command over resources needed for a decent life which is measured by the Gross Domestic Product after adjusting it for purchasing power (this reflects the difference in the cost of living between countries). The index was first published by the UN in 1990 and is being refined from year to year as more and more countries are able to provide the appropriate data.


A period of very rapid increases in the overall price level.



The policy of seeking to extend the power, domain, or territories of a nation. This could happen without direct, formal control.

International Monetary Fund (IMF)

An international agency whose main goals are the stabilization of international exchange rates as well as the lending of money to countries that have difficulties financing their international transactions.


The sum of all a household's wages, salaries, profits, interest payments, rents, and other forms of earnings in a given period of time. It is a flow measure.

Industrial Revolution

The period in England during the late 18th and early 19th centuries in which new manufacturing technologies and improved transportation gave rise to the modern factory system and a massive movement of the population from the countryside to the cities.


Inequality refers to differences that exist across groups (countries, individuals, races, gender) in terms of income, opportunities, employment etc.


A general increase in prices, often measured by the CPI (Consumer Price Index).

Interest rate

The annual interest payment on a loan expressed as a percentage of the loan. Equal to the amount of interest received per year divided by the amount of the loan.


The process by which resources are used to produce new capital. Investment is therefore measured over a period of time, with the flow of investment increasing the stock of capital.


Japanese transplants

Japanese-made vehicles that are assembled and built in America.


Kyoto Protocol

In 1997, Signed in Japan, The Kyoto Protocols consisted of 38 countries that agreed to cut back on emission below their 1998 levels and by 2010, hopefully cut back to reach below the levels of 1990, which would be about 30%.



A factor of production that includes human physical exertion performed in the creation of a good or service

Labor market

A market in which workers sell their labor time (not for work itself) in return for a wage; employers are the demanders and workers are the suppliers of labor time.

Law of demand

An empirical regularity of consumer behavior that presumes the quantity of a good demanded and the price are inversely related.

Law of supply

An empirical regularity of producer behavior that presumes the quantity of a good produced and the price of that good are directly related.

Laissez faire

An approach to economic policy that advocates a very limited role for the government, confining its activities to national defense and the enforcement of laws.



Refers to all the buying and selling activities of those persons wishing to trade a good or service; a market consists of suppliers wanting to sell and demanders wanting to buy.

Market clearing

Occurs when, at the given price, buyers want to purchase exactly the quantity that sellers want to sell.

Marxist theory

The view that the world economy is the product of exploitation by capital of labor following the principles and teachings of Karl Marx.


A theory popular among European nations in the early modern period stating that the economic and political strength of a country lay in its acquiring gold and silver, to be achieved by restricting imports, developing production for exports, and prohibiting the export of gold and silver.

Most Favored Nations Clause (MFN)

Provision ensuring equal commercial opportunities, especially concerning import duties and freedom of investment. Generally reciprocal, in the late 19th and early 20th centuries unilateral most-favored-nation clauses were imposed on Asian nations by the more powerful Western countries.. In the late 20th century tariff and trade agreements were negotiated simultaneously by all interested parties through the General Agreement on Tariffs and Trade (GATT), which ultimately resulted in the World Trade Organization.

Millennium Round

Trade negotiations in the WTO in 2000 following the Uruguay Round. Since the disappointment of the Seattle Conference, the EU is working at . confidence building. and ensuring that the concerns of all WTO members are reflected in the launch of any new round. It seeks to substantially improve market access and trading opportunities of developing world.

Montreal Protocol

Signed in 1987, it concerned global warming and the hole in the ozone layer. This treaty of international negotiations eliminated any Chlorofluorocarbons (CFCs) produced and used. The Montreal Protocol has significantly diminished the problem of the ozone layer and hopefully will continue to do so until it returns to a good state maybe by 2010.

Multinational Corporations

Companies based on one country that do business in one or more other countries.

Monetary policy

Refers to government influences on the interest rate in order to regulate the level of investment, output, employment, and other macroeconomic outcomes.

Money multiplier

The multiple by which deposits can increase for every dollar increase in reserves; equal to one divided by the required reserve ratio.


An industry or market structure in which only one large firm produces a product that has no close substitutes.


North American Free Trade Agreement (NAFTA)

Agreement between Canada, the United States, and Mexico passed by the U.S. Congress and signed by President Clinton in December 1993 in which the three countries agreed to establish all of North America as a free-trade zone.

Neoclassical economics

The theory of capitalism emphasizing the horizontal dimension of markets and voluntary exchange. Based on the idea that markets work best if left to own mechanisms, and markets can fix themselves without government interference.


Neo-liberalism is a set of economic policies that have become widespread during the last 25 years or so. Although the word is rarely heard in the United States, you can clearly see the effects of neo-liberalism here as the rich grow richer and the poor grow poorer....Around the world, neo-liberalism has been imposed by powerful financial institutions like the International Monetary Fund (IMF), the World Bank and the Inter- American Development Bank.

Net exports (EX-IM)

The difference between exports (sales to foreigners of U.S.-produced goods and services) and imports (U.S. purchases of goods and services from abroad). The figure can be positive or negative.

Nominal GDP Gross domestic product measured in current dollars.
Opportunity Cost The cost involved in giving up or forgoing, when a choice/decision is made.
Per capita GDP or GNP A country's GDP or GNP divided by its population.
Political economy

A theory that analyzes capitalism in terms of competition, command, and change.

Population Growth Rate

The difference between the birth rate and the death rate; generally expressed as so many persons per hundred

Portfolio Investment

A collection of investments that are owned by the same individual or organization.


The transfer of government business to the private sector.

Production possibility frontier (ppf)

A graph that shows all the combinations of goods and services that can be produced if all of society's resources are used efficiently.


The amount of output produced per unit of an input.


The form of surplus product in a capitalist economic system; they are what is left over, out of sales revenue, after wages, the cost of materials used up, and wear and tear on machines have been paid.

Purchasing power parity

A theory of international exchange holding that exchange rates are set so that the price of similar goods in different countries is the same.


Quantity demanded

The amount (number of units) of a product that a household would buy in a given period if it could buy all it wanted at the current market price.

Quantity supplied

The amount of a particular product that a firm would be willing and able to offer for sale at a particular price during a given time period.



A naturally occurring substance of potential profit that can be extracted under prevailing conditions.

Resource Allocation

Apportionment of productive assets among different uses. The choice among alternative uses determines the composition of the social product. Resource allocation arises as an issue because the resources of a society are in limited supply, whereas human wants are usually unlimited, and because any given resource can have many alternative uses.In free-enterprise systems, the primary mechanism through which resources are distributed among the uses most desired by consumers is the price system. In planned economies and in the public sectors of mixed economies, the choice of how resources are distributed is a political one. Within the limits of existing technology, the aim of any economizing agency within a society is to allocate resources in such a way as to obtain the maximum possible output from a given combination of resources.



The fact that the world's resources are limited in their supply and, therefore, have a value.

Smoot-Hawley tariff

The U.S. tariff law of the 1930's, which set the highest tariffs in U.S. history (60%). It set off an international trade war and caused the decline in trade that is often considered a cause of the worldwide depression of the 1930's.

Social benefits

Those that accrue to everyone.

Social costs

The costs of producing a good or service which are borne by society as a whole.

Socialist economy

An economy in which most capital is owned by the government rather than by private citizens. Also called social ownership.


Refers to the combination of slower economic growth (stagnation) and generally rising prices (inflation) that characterized the hard times of the 1970's.

Supply curve

Indicates, for each possible price, how much of the good or service suppliers wish to sell.



A schedule of duties places on products. A tariff may be added on an ad valorum basis (as a percentage of value) or on a specific basis (as an amount per unit). Tariffs are used to serve many functions -- to make imports expensive relative to domestic substitutes; to retaliate against restrictive trade policies of other countries; to protect infant industries; and to protect strategic industries, such as agriculture, in times of war.


The relationship between inputs and outputs in a labor process.

Trade deficit

The excess of the value of a country's imports of goods and services over its exports of goods and services.

Trade surplus

The excess of the value of a country's exports of goods and services over its imports of goods and services.



Occurs when there are not enough jobs for all those who want jobs (an excess supply in the labor market).

Uruguay Round

The last round of the GATT talks that began in 1986 and ended in December, 1993.

U.S.-Canadian Free-Trade Agreement

An agreement in which the United States and Canada agreed to eliminate all barriers to trade between the two countries by 1998.



The tendency of a variation in prices, anything that is not stable.


Washington Consensus

Rooting back to the 1980s and the movements for deregulation and privatization, an idea built around the WTO, which became the touchstone for a successful export of ideas about the new global economy.

World Bank

An international agency set up to lend money to countries requiring aid for economic development.

World economy

A multistate economic system created in the late fifteenth and early sixteenth centuries by European capitalism and, later, its overseas progeny.

World Trade Organization (WTO)

The WTO, initiated on January 1, 1995, is an international organization that has been designed in order to supervise and promote the liberalization of world trade.