Glossary

accidents of birth: Differences in life prospects that arise from factors beyond your control, such as the wealth or educational attainment of your parents.
arbitrage: The practice of buying a good at a low price in a market to sell it at a higher price in another. Traders engaging in arbitrage take advantage of the price difference for the same good between two countries or regions. As long as the trade costs are lower than the price gap, they make a profit.
asset: Anything of value that is owned.
asymmetric information: Information that is relevant to the parties in an economic interaction, but is known by some but not by others.
budget constraint: An equation that represents all combinations of goods and services that one could acquire that exactly exhaust one’s budgetary resources.
capitalism: An economic system in which the main form of economic organization is the firm, in which the private owners of capital goods hire labour to produce goods and services for sale on markets with the intent of making a profit. The main economic institutions in a capitalist economic system, then, are private property, markets, and firms.
commodity exports: The exports of goods that are fully fungible in international markets, which means goods that have the same basic qualities independently of who produces them. This allows for the establishment of exchanges like the London Metal Exchange or the Chicago Mercantile Exchange where these products are traded as assets. Examples of commodities are oil, gas, copper, platinum, cotton, and wheat. Examples of products that are not a commodity, so that the origin matters, are products in which quality and variety are important attributes, such as shirts, cars, and computers.
consumption (C): Expenditure on consumer goods including both short-lived goods and services and long-lived goods, which are called consumer durables.
credit-constrained: A description of individuals who are able to borrow only on unfavourable terms.
debt stock: The total amount or value of debt that an agent (for example, an individual, a company, or a government) has outstanding at any point in time. Another way of understanding debt stock is that it is the total amount that an agent would have to pay to be free of debt.
decreasing returns to scale: These occur when doubling all of the inputs to a production process less than doubles the output. Also known as: diseconomies of scale.
depreciation: The loss in value of a form of wealth that occurs either through use (wear and tear) or the passage of time (obsolescence).
diminishing marginal utility: A property of some utility functions according to which each additional unit of a given variable results in a smaller increment to total utility than did the previous additional unit.
discount rate: A measure of the person’s impatience: how much the person values an additional unit of consumption now relative to an additional unit of consumption later. It is the slope of the person’s indifference curve for consumption now and consumption later, minus one. Also known as: subjective discount rate.
diseconomies of scale: These occur when doubling all of the inputs to a production process less than doubles the output. Also known as: decreasing returns to scale.
disposable income: Income available after paying taxes and receiving transfers from the government.
economies of scale: These occur when doubling all of the inputs to a production process more than doubles the output. The shape of a firm’s long-run average cost curve depends both on returns to scale in production and the effect of scale on the prices it pays for its inputs. Also known as: increasing returns to scale. See also: diseconomies of scale.
endowment: The facts about an individual that may affect their income, such as the physical wealth a person has, either land, housing, or a portfolio of shares (stocks). Also includes level and quality of schooling, special training, the computer languages in which the individual can work, work experience in internships, citizenship, whether the individual has a visa (or green card) allowing employment in a particular labour market, the nationality and gender of the individual, and even the person’s race or social class background.
exports (X): Goods and services produced in a particular country and sold to households, firms and governments in other countries.
feasible frontier: The curve made of points that defines the maximum feasible quantity of one good for a given quantity of the other.
fiscal federalism: A situation in which budget and tax decisions are divided among different parts of the state. An example is geographic fiscal federalism that occurs when subnational entities such as states or provinces have sovereignty over parts of the budget.
flow: A quantity measured per unit of time, such as annual income or hourly wage.
foreign direct investment (FDI): Ownership and substantial control over assets in a foreign country. See also: foreign portfolio investment.
foreign portfolio investment: The acquisition of bonds or shares in a foreign country where the holdings of the foreign assets are not sufficiently great to give the owner substantial control over the owned entity. Foreign direct investment (FDI), by contrast, entails ownership and substantial control over the owned assets. See also: foreign direct investment.
Gini coefficient: A measure of inequality of any quantity such as income or wealth, varying from a value of zero (if there is no inequality) to one (if a single individual receives all of it).
global inequality: An estimate of income or wealth inequality among all people on the planet.
globalization: A process by which the economies of the world become increasingly integrated by the freer flow across national boundaries of goods, investment, finance, and to a lesser extent, labour. The term is sometimes applied more broadly to include ideas, culture, and even the spread of epidemic diseases.
government debt: The total amount that a state owes to others. These creditors can be private citizens or companies of the same country, foreign agents, other governments, international banks, and multilateral agencies such as the International Monetary Fund or the World Bank.
government debt crisis: A situation in which a state somehow becomes unable to pay a substantial part of its sovereign debt. When this happens we usually say that the country has gone into ‘default’ and, as happens with individuals and companies that find themselves in similar situations, must renegotiate with its creditors.
gross domestic product (GDP): A measure of the market value of the output of final goods and services in the economy in a given period. Output of intermediate goods that are inputs to final production is excluded to prevent double counting.
gross national income (GNI): A measure of the total amount of income earned by residents in a country, irrespective of where the income is produced (within the country or abroad). It is different from gross domestic product, which measures the production within a country, irrespective of who owns the income that the production generates.
human capital: The stock of knowledge, skills, behavioural attributes, and personal characteristics that determine the labour productivity or labour earnings of an individual. Investment in this through education, training, and socialization can increase the stock, and such investment is one of the sources of economic growth. Part of an individual’s endowments.
impatience: Any preference to move consumption from the future to the present. This preference may be derived either from pure impatience or diminishing marginal returns to consumption.
income: The amount of profit, interest, rent, labour earnings, and other payments (including transfers from the government) received, net of taxes paid, measured over a period of time such as a year. The maximum amount that you could consume and leave your wealth unchanged. Also known as: disposable income.
income ratios: A measure of inequality that compares income at a given percentile of the income distribution to that of another by taking a ratio. For example, the 90:10 ratio compares income at the 90^th percentile to income at the 10^th percentile.
income shares: A measure of the share of income going to some portion of the income distribution, for example, the share going to the top 10% or the top 1%.
incomplete contract: A contract that does not specify, in an enforceable way, every aspect of the exchange that affects the interests of parties to the exchange (or of others).
indifference curve: A curve of the points which indicate the combinations of goods that provide a given level of utility to the individual.
inequality between countries: A measure of inequality between countries that relies on national average incomes rather than individual incomes.
inequality of opportunity: Differences across people that arise because of barriers to access, such as school and neighbourhood quality, or discrimination based on race or gender.
inequality of outcomes: Differences across people in the material dimensions of wellbeing arising from any source, including family background, individual talent and effort.
inflation targeting: Monetary policy regime where the central bank changes interest rates to influence aggregate demand in order to keep the economy close to an inflation target, which is normally specified by the government.
interest rate: The price of bringing some buying power forward in time.
loan term: The amount of time the borrower has to repay the loan.
Lorenz curve: A graphical representation of inequality of some quantity such as wealth or income. Individuals are arranged in ascending order by how much of this quantity they have, and the cumulative share of the total is then plotted against the cumulative share of the population. For complete equality of income, for example, it would be a straight line with a slope of one. The extent to which the curve falls below this perfect equality line is a measure of inequality. See also: Gini coefficient.
marginal rate of substitution (MRS): The trade-off that a person is willing to make between two goods. At any point, this is the slope of the indifference curve. See also: marginal rate of transformation.
marginal rate of transformation (MRT): The quantity of some good that must be sacrificed to acquire one additional unit of another good. At any point, it is the slope of the feasible frontier. See also: marginal rate of substitution.
market income: Income before paying taxes and receiving transfers from the government.
maximin principle: A decision-making principle that aims to maximise the welfare of the least fortunate in society.
monetary policy: Central bank (or government) actions aimed at influencing economic activity through changing interest rates or the prices of financial assets.
peg (currency): A currency peg is another way of referring to a fixed exchange rate regime, that is, a situation in which the central bank of a country (or the central government) fixes the price of its currency in a certain amount of another country’s currency (usually the US dollar).
predistribution policy: Government actions that affect the endowments people have and their value, including the distribution of market income and the distribution of privately held wealth. Examples include education, minimum wage, and anti-discrimination policies. See also: redistribution policy.
principal–agent relationship: This relationship exists when one party (the principal) would like another party (the agent) to act in some way, or have some attribute that is in the interest of the principal, and that cannot be enforced or guaranteed in a binding contract. See also: incomplete contract. Also known as: principal–agent problem.
public choice: A branch of economics that uses its analytical tools (including mathematics, microeconomics, and contract and game theory) to analyse problems usually studied by political science, such as elections, institutions, and political problems in general.
redistribution policy: Taxes, monetary, and in-kind transfers of the government that result in a distribution of final income that differs from the distribution of market income. See also: predistribution policy.
service (of a debt): The total amount or value of debt that an agent (for example, an individual, a company, or a government) has outstanding at any point in time. Another way of understanding debt stock is that it is the total amount that an agent would have to pay to be free of debt.
short-termism: This subjective term refers to the case when the person making a judgement places too much weight on costs, benefits, and other things occurring in the near future than would be appropriate.
stock: A quantity measured at a point in time. Its units do not depend on time. See also: flow.
structural adjustment programme (SAP): A set of policy reforms and budget cuts that a country must promise in order to access a loan from the International Monetary Fund.
syndicated loan: A loan that is provided by a group of banks or financial institutions instead of just one of them. It usually involves a governance agreement between them that is embedded in the contract.
tax smoothing: A fiscal budgeting policy that consists of setting spending at a level consistent with long-term, structural, or ‘permanent’ tax revenues. Since tax collection is cyclical and affected by the fluctuations in the economy, this requires the government to save when it has especially high tax revenue and to use those savings and/or incur debt when tax revenues are especially low.
too big to fail: Said to be a characteristic of large banks, whose central importance in the economy ensures they will be saved by the government if they are in financial difficulty. The bank thus does not bear all the costs of its activities and is therefore likely to take bigger risks.
wealth: Stock of things owned or value of that stock. It includes the market value of a home, car, any land, buildings, machinery or other capital goods that a person may own, and any financial assets such as shares or bonds. Debts are subtracted—for example, the mortgage owed to the bank. Debts owed to the person are added.