Classical Economics

An economic theory that emphasizes the role of free-market forces, allowing them to operate without government intervention.

Deadweight Loss

A loss of economic efficiency that can occur when the free market equilibrium for a good or a service is not achieved.

Contractionary Fiscal Policy

Government policy that attempts to reduce the level of economic activity through decreased spending or increased taxes.

Consumer Price Index (CPI)

A measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food, and medical care.

Budget Surplus

A situation in which government revenue exceeds expenditures.

Automatic Stabilizers

Economic policies and programs that are designed to offset fluctuations in a nation's economic activity without intervention by the government or policymakers.

Complementary Goods

Goods that are often used together.

Discount Rate

The interest rate set by the central bank for loans to commercial banks.

Budget Deficit

A situation in which government expenditures exceed revenue.

Endogenous Variables

Variables determined within the model.

Capital Deepening

An increase in the amount of capital per worker; one source of rising labor productivity.

Balance of Payments

A record of all transactions made between one particular country and all other countries during a specified period of time.

Cyclical Unemployment

Unemployment that results when the overall demand for goods and services in an economy cannot support full employment.

Depression

A severe and prolonged downturn in economic activity.

Coincident Economic Indicators

Economic indicators that usually change at the same time as the whole economy.

Absolute Advantage

The ability of an individual, firm, or country to produce more of a good or service than competitors, using the same amount of resources.

Aggregate Demand

The total demand for final goods and services in an economy at a given time.

Comparative Advantage

The ability of an individual, firm, or country to produce a good or service at a lower opportunity cost than competitors.

Diminishing Marginal Utility

A principle stating that as a person increases consumption of a product, there is a decline in the marginal utility that person derives from consuming each additional unit of that product.

Cross Elasticity of Demand

A measure of the responsiveness of the quantity demanded of a good to a change in the price of another good.

Economies of Scale

The cost advantage that arises with increased output of a product.

Diseconomies of Scale

The disadvantages that arise due to the increase in size of an organization, leading to inefficiencies.

Contractionary Monetary Policy

A policy by a central bank to decrease the money supply, usually by raising interest rates.

Aggregate Supply

The total supply of goods and services that firms in an economy plan on selling during a specific time period.

Business Cycle

A cycle or series of cycles of economic expansion and contraction.