45-degree line: the line showing that aggregate expenditure equals aggregate income (chapter 11)

absolute advantage: a situation in which a person or country is more efficient at producing a good in comparison with another person or country (chapter 20)

ad valorem tariff: a tax on imports evaluated as a percentage of the value of the import (chapter 21)

aggregate demand: the total demand for goods and services by consumers, businesses, government and foreigners (chapter 5)

aggregate demand (AD) curve: a line showing a negative relationship between inflation and the aggregate quantity of goods and services demanded at that inflation rate (chapter 13)

aggregate expenditure line: the relation between the sum of the four components of spending (C + I + G + X ) and aggregate income (chapter 11)

aggregate hours: the total number of hours worked by all workers in the economy in a given period of time (chapter 8)

aggregate income: the total income received by all factors of production in the economy (also called ‘income’) (chapter 11)

aggregate supply: the total value of all goods and services produced in the economy by the available supply of capital, labour and technology (also called potential GDP) (chapter 5)

antidumping duty: a tariff imposed on a country as a penalty for dumping goods (chapter 21)

asset: something of value owned by a person or a firm (chapter 10)

assumptions: judgements about features that can be ignored, to make the world easier to understand (chapter 1)

Australian Bureau of Statistics (ABS): an Australian Government agency that is responsible for preparing and publishing vital statistics on the Australian economy and its sectors (chapter 6)

Australian Prudential Regulation Authority (APRA): a public body that in July 1998 replaced the RBA as the controlling authority of the banking industry (chapter 10)

automatic stabilisers: automatic tax and spending changes that occur over the course of the business cycle that tend to stabilise the fluctuations in real GDP (chapter 15)

autonomous consumption: the part of consumption that is determined by factors other than income (chapter 11)

autonomous expenditure: the part of total spending that does not depend on income (chapter 11)

average propensity to consume (APC): the fraction of income devoted to consumption (chapter 11)

balance of payments: the record of all the transactions between a country and the rest of the world. It includes information on the value of trade in goods and services as well as transfer payments. (chapter 17)

balanced budget: a budget for which revenue equals spending (chapter 15)

balanced budget multiplier: the ratio of the change in real GDP to a change in government purchases when the change in government purchases is matched by an equivalent change in taxes (chapter 12)

balancing item: the difference between the current account and the capital account of the balance of payments, which arises from errors and omissions associated with the measurement of the capital account (chapter 17)

bank: a firm that channels funds to investors by accepting deposits and making loans (chapter 10)

barter: trade in goods or services without the use of money (chapter 10)

baseline: the path of an economic variable that would occur without the policy change under consideration (chapter 14)

bilateral trade balance: the value of imports less the value of exports between two countries (chapter 17)

black market: a market in which goods and services are illegally traded at prices above the price ceiling (chapter  3)

bond: a promise by a firm or government to pay a certain amount of money to the bondholder on a fixed date in the future. It is a financial contract that stipulates a specific repayment of principal plus interest on a loan at a given date in the future. (chapters 10 and 15)

boom—bust cycle: a business cycle caused by a monetary policy in which interest rates are initially too low, causing a boom, and there is a subsequent increase in interest rates, which causes a recession (chapter 14)

Bretton Woods system: the international monetary system put in place after World War II. It was based on fixed exchange rates. Infrequent adjustments of the exchange rates were permitted and did occur under the Bretton Woods system. (chapter 17)

broad money: M3 plus borrowings by non-bank financial intermediaries from the private sector less their holdings of currency and deposits (chapter 10)

budget deficit: the amount by which government spending exceeds revenue (chapter 15)

budget surplus: the amount by which revenue exceeds spending (chapter 15)

business cycles: short-term fluctuations in real GDP and employment (chapter 5)

business fixed investment: investment by firms in physical capital, such as factories and equipment (chapter 6)

capital: the factories, improvements to cultivated land, machinery and other tools, equipment and structures used to produce goods and services (chapters 2 and 5)

capital abundant: a higher level of capital per worker in one country relative to another (chapter 20)

capital account: the part of the international accounts of a country that keeps track of the change in domestic assets owned by foreigners and foreign assets owned by citizens (chapter 17)

capital income: the sum of profits, rental payments and interest payments (chapter 6)

capital intensive: production that uses a relatively high level of capital per worker (chapter 20)

capital-saving technological change: a technological innovation that reduces the amount of capital needed to produce a given amount of output with a given amount of labour (chapter 9)

cash: for the purpose of conducting open-market operations, regarded by the RBA as the currency and balances in the exchange settlement accounts (chapter 10)

catch-up line: the downward-sloping relation between the level of productivity and growth of productivity predicted by growth theory (chapter 19)

causation: a relation of cause and effect between variables in which one variable is a determinant of another variable (chapter 1)

central bank independence: a description of the legal authority of central banks to make decisions on monetary policy with little interference by the government in power (chapter 16)

certificate of deposit (CD): a negotiable term deposit that can be bought and sold in a secondary market (chapter 10)

ceteris paribus : all other things being equal; refers to holding all other variables constant or keeping all other things the same when one variable is changed (chapter 1)

chain price index: a price index using a changing basket of goods and services computed just as real GDP is computed (chapter 6)

choice: a selection among alternative goods, services or actions (chapter 2)

coincidence of wants: a condition required for exchange in a non-monetary system. To accomplish a trade, it is necessary to find someone who has what you want and who also wants what you have (chapter 10)

command economy: an economy in which the government determines prices and production (also called a centrally planned economy) (chapter 1)

commodity money: a good used as money that has some intrinsic value in a non-monetary use (chapter 10)

comparative advantage: a situation in which a person or country can produce one good more efficiently than another good in comparison with another person or country (chapters 2, 17 and 20)

complement: a good that is usually consumed or used together with another good (chapter 3)

conditional forecast: a prediction that depends on assumed values for government purchases, taxes or some other variable that affects the forecast (chapter 11)

conditionality: stipulations on loans to countries from the International Monetary Fund that certain policy prescriptions, such as price reforms or reducing government budget deficits, must be met to receive funds (chapter 19)

constant money growth rule: a monetary policy in which the central bank keeps money growth constant (chapter 16)

consumer price index (CPI): a price index equal to the current price of a fixed market basket of consumer goods and services in a base year (chapter 6)

consumption: purchases of final goods and services by individuals (chapter 6)

consumption function: the positive relationship between consumption and income (chapter 11)

consumption share: the proportion of GDP that is used for consumption. It equals consumption divided by GDP, or C/Y (chapter 7)

controlled experiments: empirical tests of theories in a controlled setting in which particular effects can be isolated (chapter 1)

coordination failure: a situation where, because their actions are interdependent, people fail to act in a manner that is mutually beneficial (chapter 18)

correlation: the degree to which economic variables are observed to move together. If they move in the same direction there is positive correlation; if they move in opposite directions there is negative correlation. (chapter 1)

countercyclical policy: a policy designed to offset the fluctuations in the business cycle (chapter 15)

country in transition: a country that is transforming from a centrally planned economy to a market economy (chapter 19)

cross-price elasticity of demand: the percentage change in the quantity demanded of one good divided by the percentage change in the price of another good (chapter 4)

crowding out: the decline in private investment owing to an increase in government purchases (chapter 7)

currency: money in its physical form: coin and paper money (chapter 10)

currency-to-deposit ratio: the proportion of currency that people in the economy want to hold relative to their deposits. It equals currency divided by deposits. (chapter 10)

current account balance: the value of exports minus the value of imports plus net factor income from abroad plus net transfers from abroad (chapter 17)

current deposit: an account at a financial institution on which cheques can be written (chapter 10)

customs union: a free-trade area with a common external tariff (chapter 21)

cyclical unemployment: unemployment due to a recession, when the rate of unemployment is above the natural rate of unemployment (chapter 8)

debt-to-GDP ratio: the total amount of outstanding loans the Federal Government owes divided by nominal GDP (chapter 15)

deflation: a decrease in the overall price level, or a negative inflation rate (chapter 14)

demand: a relationship between price and quantity demanded (chapter 3)

demand curve: a graph of demand showing the downward-sloping relationship between price and quantity demanded (chapter 3)

demand schedule: a tabular presentation of demand showing the price and quantity demanded for a particular good, all else being equal (chapter 3)

demand shock: a shift in one of the components of aggregate demand that leads to a shift in the aggregate demand curve (chapter 14)

depreciation: the decrease in an asset’s value over time. For capital, it is the amount by which physical capital wears out over a given period of time. (chapter 6)

developing country: a country that is poor by world standards in terms of real GDP per capita (chapter 19)

diffusion: the spreading of an innovation throughout the economy (chapter 9)

diminishing returns: a situation in which successive increases in the use of an input, holding other inputs constant, will eventually cause a decline in the additional production derived from one more unit of that input (chapter 9)

discretionary fiscal policy: changes in tax or spending policy requiring legislative or administrative action by the government or Parliament (chapter 15)

disinflation: a reduction in the inflation rate (chapter 14)

disposable income: income that households have to spend after taxes have been paid and transfers from the government have been received (chapter 11)

division of labour: the division of production into various parts in which different groups of workers specialise (chapters 2 and 9)

domestic content restriction: a requirement that a fraction of the product must be produced within the area to qualify for zero tariffs between the countries in the free-trade area (chapter 21)

dumping: the selling of goods by foreign firms at a price below average cost or below the price in the domestic country (chapter 21)

dynamic comparative advantage: changes in comparative advantage over time from investment in physical and human capital and in technology (chapter 20)

econometrics: the use of economic theory, mathematical methods and statistical techniques to analyse economic phenomena (chapter 1)

economic development: the process of growth whereby countries raise incomes per capita and become industrialised (also refers to the branch of economics that studies this process) (chapter 19)

economic fluctuations: swings in real GDP that lead to deviations of the economy from its long-term growth trend (chapter 5)

economic growth: an upward trend in real GDP, reflecting expansion in the economy over time. It can be represented as an outward shift in the production possibilities curve. (chapters 2 and 5)

economic history: the study of economic events and the collection of economic observations from the past (chapter 1)

economic interaction: exchanges of goods and services between people (chapter 2)

economic model: an explanation of how the economy or part of the economy works (chapter 1)

economic variable: any economic measure that can vary over a range of values (chapter 1)

efficiency wage: a wage higher than that which would equate quantity supplied and quantity demanded set by employers to increase worker efficiency, for example, by decreasing shirking by workers (chapter 8)

elastic demand: demand for which price elasticity is greater than 1 (chapter 4)

elasticity: the measure of how sensitive one variable is to another (chapter 4)

employment-to-population ratio: the ratio (usually expressed as a percentage) of employed workers to the working-age population (chapter 8)

equilibrium interest rate: the interest rate that equates the sum of consumption, investment and net export shares to the shares of GDP available for non-government use (chapter 7)

equilibrium price: the price at which quantity supplied equals quantity demanded (chapter 3)

equilibrium quantity: the quantity traded at the equilibrium price (chapter 3)

exchange rate: the price of one currency in terms of another (chapter 2)

exchange settlement accounts: accounts that banks hold with the RBA to be used to settle inter-bank debt (chapter 10)

expansion: the period between the trough of a recession and the next peak, consisting of a general rise in output and employment (chapter 5)

experimental economics: a branch of economics that uses laboratory experiments to analyse economic behaviour (chapter 1)

export: the sale of goods and services abroad (chapter 20)

exports: the total value of the goods and services that people in one country sell to people in other countries (chapter 6)

factor income: earnings for a factor of production including wages and profits (chapter 17)

federal budget: a summary of the Federal Government’s proposals for revenue and spending (chapter 15)

federal debt: the total amount of outstanding loans owed by the Federal Government (chapter 15)

final good: a new good that undergoes no further processing before it is sold to consumers (chapter 6)

fiscal policy: the government’s plans for spending, for taxes and for borrowing if required (chapter 15)

fiscal policy rule: a description of how the instruments of policy regularly respond to the state of the economy. Automatic stabilisers are an example of a fiscal policy rule. (chapter 15)

fixed exchange rate system: a system of international exchange rates in which the countries agree to maintain a predetermined value of their currencies in terms of other currencies (chapter 17)

flexible exchange rate system: an international monetary system in which exchange rates are determined in foreign exchange markets and governments do not agree to fix them (chapter 17)

flexible price assumption: an assumption that prices adjust instantaneously in response to a change in supply or demand (chapter 11)

forecast: a prediction of an economic variable such as real GDP (chapter 11)

foreign direct investment: investment by a foreign entity of at least a 10 per cent direct ownership share in a firm (chapter 19)

foreign exchange market intervention: purchases and sales of foreign currency by a government in foreign exchange markets with the intention to affect the exchange rate (chapter 17)

free trade: a complete lack of restrictions on international trade (chapter 20)

free-trade area (FTA): an area that has no trade barriers between the countries in the area (chapter 21)

freely determined prices: prices that are determined by the individuals and firms interacting in markets (chapter 2)

frictional unemployment: short-term unemployment arising from normal turnover in the labour market, such as when people change occupations or locations, or are new entrants (chapter 8)

futures market: a market that deals in commodities to be delivered in the future (chapter 17)

gains from trade: improvements in income, production or satisfaction owing to the exchange of goods or services (chapters 2 and 20)

GDP at factor cost: a measure of GDP that does not take into account indirect business taxes and subsidies (chapter 6)

GDP deflator: nominal GDP divided by real GDP. It measures the level of prices of goods and services included in real GDP relative to a given base year. (chapter 6)

General Agreement on Tariffs and Trade (GATT): an international treaty and organisation designed to promote mutual reductions in tariffs and other trade barriers among countries (chapter 21)

general price level: the price of a bundle of goods and services measured as an index relative to a base period (chapter 5)

gold standard: a monetary standard in which the value of paper money is linked to gold (chapters 10 and 16)

goods and services tax (GST): a consumption (as opposed to income) tax levied on the purchases of goods and services by consumers (chapter 18)

government expenditure: purchases by Federal, State and local governments of new goods and services (chapter 6)

government expenditure share: the proportion of GDP that is used for government purchases. It equals government purchases divided by GDP, or G/Y. (chapter 7)

government failure: a situation in which the government makes things worse than the market, even though there may be market failure (chapter 2)

gross domestic product (GDP): a measure of the value of all the goods and services newly produced in an economy during a specified period of time (chapter 2)

gross investment: the total amount of investment, including that which goes to replacing worn-out capital (chapter 6)

gross national income: the sum of aggregate income and net income from non-residents (chapter 6)

growth accounting formula: an equation that states that the growth rate of real GDP per hour of work equals capital’s share of income times the growth rate of capital per hour of work plus the growth rate of technology (chapter 9)

headline deficit/surplus: the deficit/surplus adjusted for net advances (chapter 15)

hedge: to reduce risk, usually by buying a futures contract to guarantee a price several months in the future (chapter 17)

human capital: accumulated education and training workers receive that increases their productivity (chapter 9)

implicit contract: an informal agreement between a firm and its customers or between a firm and its employees (chapter 11)

implicit price deflator (IPD): a GDP price deflator that the ABS calculates by dividing nominal GDP by the chain volume measure of real GDP (chapter 6)

import: the purchase of goods and services from abroad (chapter 20)

imports: the total value of the goods and services that people in one country buy from people in other countries (chapter 6)

incentives: devices that motivate people to take action, usually so as to increase economic efficiency (chapters 1 and 2)

income elasticity of demand: the percentage change in quantity demanded of one good divided by the percentage change in income (chapter 4)

increasing opportunity costs: a situation in which producing more of one good requires giving up producing an increasing amount of another good (chapter 2)

indirect taxes: taxes, such as sales taxes, that are levied on products when they are sold (chapter 6)

industrialised country: a country with a large industrial base that is relatively well off by world standards in terms of real GDP per capita (chapter 19)

inelastic demand: demand for which the price elasticity is less than 1 (chapter 4)

infant industry argument: the view that a new industry may be helped to develop by protectionist policies (chapter 21)

inferior good: a good for which demand decreases when income rises and increases when income falls (chapter 3)

inflation adjustment (IA) line: a flat line showing the level of inflation in the economy at a given point in time. It shifts up when real GDP is greater than potential GDP, and it shifts down when real GDP is less than potential GDP. It also shifts when expectations of inflation or raw materials prices change. (chapter 13)

inflation rate: the percentage increase in the overall price level from one year to the next (chapter 5)

informal economy: the portion of an economy characterised by illegal, unregulated businesses (chapter 19)

innovation: applications of new knowledge in a way that creates new products or significantly changes old ones (chapter 9)

inputs or factors of production: labour, capital and other resources used in the production of goods and services (chapter 2)

insider: a person who already works for a firm and has some influence over wage and hiring policy (chapter 8)

intellectual property laws: laws that protect ownership rights over ideas and inventions; includes patent laws, copyright laws and trademark laws (chapter 9)

interest rate: the amount received per dollar loaned per year, usually expressed as a percentage (e.g. 6 per cent) of the loan (chapter 5)

intermediate good: a good that undergoes further processing before it is sold to consumers (chapter 6)

International Monetary Fund (IMF): an international agency, established after World War II, designed to help countries with balance of payments problems and to ensure the smooth functioning of the international monetary system (chapter 19)

international monetary independence: the idea that a flexible exchange rate system gives a country the ability to have much different interest rates than other countries (chapter 17)

international trade: the exchange of goods and services between people or firms in different nations (chapters 2 and 20)

international transfer payments: payments across international borders in the form of grants, remittances and aid (chapter 17)

invention: a discovery of new knowledge (chapter 9)

inventory investment: a change in the stock of inventories from one date to another (chapter 6)

investment: purchases of final goods by firms plus purchases of newly produced residences by households, as well as inventory investment (chapters 6 and 7)

investment share: the proportion of GDP that is used for investment. It equals investment divided by GDP, or I/Y. (chapter 7)

job leavers: people who are unemployed because they quit their previous job (chapter 8)

job losers: people who are unemployed because they lost their previous job (chapter 8)

job rationing: a reason for unemployment whereby the quantity of labour supplied is greater than the quantity demanded because the real wage is too high (chapter 8)

job search: a reason for unemployment whereby uncertainty in the labour market and workers’ limited information requires people to spend time searching for a job (chapter 8)

job vacancies: positions that firms are trying to fill, but for which they have yet to find suitable workers (chapter 8)

Keynesian revolution: a change in macroeconomic thinking, shaped by the Great Depression and the work of John Maynard Keynes, leading to a greater consideration of demand-side policies (chapter 18)

Keynesian school: a school of macroeconomic thought concerned with pursuing demand-side macroeconomic policies, primarily fiscal policies working through the multiplier, to reduce unemployment and encourage economic growth (chapter 18)

labour: the number of hours people work in producing goods and services (chapters 2 and 5)

labour abundant: a lower level of capital per worker in one country relative to another (chapter 20)

labour demand curve: a downward-sloping relationship showing the quantity of labour firms are willing to hire at each wage (chapter 8)

labour force: all those who are either employed or unemployed (chapter 8)

labour force participation rate: the ratio (usually expressed as a percentage) of people in the labour force to the working-age population (chapter 8)

Labour Force Survey: a monthly survey of a sample of Australian households carried out by the Australian Bureau of Statistics. It measures employment, unemployment, the labour force and other characteristics of the Australian population. (chapter 8)

labour income: the sum of wages, salaries and supplements paid to workers (chapter 6)

labour intensive: production that uses a relatively low level of capital per worker (chapter 20)

labour productivity: output per hour of work (chapter 5)

labour supply curve: the relationship showing the quantity of labour workers are willing to supply at each wage (chapter 8)

labour-saving technological change: a technological innovation that reduces the amount of labour needed to produce a given amount of output with a given amount of capital (chapter 9)

law of demand: the tendency for the quantity demanded of a good in a market to decline as its price rises (chapter 3)

law of one price: the notion that, with low transportation costs and no trade barriers, the same commodity is sold for the same price in two different countries when measured in the same currency (chapter 17)

law of supply: the tendency for the quantity supplied of a good in a market to increase as its price rises (chapter 3)

learning by doing: a situation in which workers become more proficient by doing a particular task many times (chapter 9)

liability: something of value a person or firm owes to someone else (chapter 10)

limited information: a situation in which firms have incomplete knowledge about some market conditions, such as whether a change in demand for their product is temporary or permanent or whether the change is due to a recession or boom in the whole economy (chapter 11)

linear: a situation in which a curve is straight, with a constant slope (chapter 1 appendix)

loan: an interest-bearing asset to the bank that lends money to an individual or firm (chapter 10)

M1: currency plus current deposits (chapter 10)

M3: M1 plus other deposits of the private non-bank sector (chapter 10)

macroeconomics: the branch of economics that examines the workings and problems of the economy as a whole, such as economic growth, inflation, unemployment and economic fluctuations (chapter 1)

Malthusian equilibrium: a situation in which production equals the subsistence level of output because population adjusts based on consumption of food (chapter 9)

marginal propensity to consume (MPC): the slope of the consumption function, showing the change in consumption that is due to a given change in income (chapter 11)

marginal propensity to import (MPI): the change in imports as a result of a given change in income (chapter 12)

marginal propensity to save (MPS): the change in saving due to a given change in income – MPS = 1 - marginal propensity to consume (MPC) (chapter 12)

market: an arrangement whereby economic exchanges between people take place (chapters 1 and 2)

market economy: an economy characterised by freely determined prices and the free exchange of goods and services in markets (chapter 1)

market equilibrium: the situation in which the price is equal to the equilibrium price and the quantity traded equals the equilibrium quantity (chapter 3)

market failure: any situation in which the market does not lead to an efficient economic outcome and in which there is a potential role for government (chapters 1 and 2)

medium of exchange: an item that is generally accepted as a means of payment for goods and services (chapters 2 and 10)

mercantilism: the notion, popular in the 1700s, that the wealth of a nation was based on how much it could export in excess of its imports and thereby accumulate precious metals (chapter 20)

merchandise trade: trade in goods that have physical form, such as oil, wheat or computers (chapter 17)

merchandise trade balance: the value of merchandise exports minus the value of merchandise imports (chapter 17)

microeconomics: the branch of economics that examines individual decision-making at firms and households and the way in which they interact in specific industries and markets (chapter 1)

minimum wage: a wage per hour below which it is illegal to pay workers (chapters 3 and 8)

mixed economy: a market economy in which the government plays a very large role (chapter 1)

monetarist school: a school of macroeconomic thought that holds that changes in the money supply are the primary cause of fluctuations in real GDP and the ultimate cause of inflation (chapter 18)

monetary base: the sum of currency in circulation and banks’ reserves (chapter 10)

monetary policy rule: a description of how much the interest rate or other instruments of monetary policy respond to inflation or other measures of the state of the economy (chapter 13)

monetary transmission channel: a description of how a change in monetary policy eventually affects real GDP (chapter 16)

money: that part of a person’s wealth that can be readily used for transactions. Money also serves as a store of value and a unit of account. (chapter 10)

money demand: a relationship between the interest rate and the quantity of money that people are willing to hold at any given interest rate (chapter 16)

money multiplier: the multiple by which the money supply changes due to a change in the monetary base (chapter 10)

money supply: the sum of currency (coin and paper money) held by the public and deposits at banks (chapter 10)

most-favoured nation (MFN): the principle by which all countries involved in GATT negotiations receive the same tariff rates as those of the country with the lowest negotiated tariff rates (chapter 21)

movement along the curve: a situation in which a change in the variable on one axis causes a change in the variable on the other axis, but maintains the position of the curve (chapter 1 appendix)

multifactor productivity: constant price gross output per combined unit of labour and capital (chapter 9)

multilateral negotiation: simultaneous tariff reductions on the part of many countries (chapter 21)

multilateral trade: trade among more than two persons or nations (chapter 2)

multiplier: the ratio of the change in real GDP to the shift in the aggregate expenditure line (chapter 12)

national saving: aggregate income minus consumption minus government purchases (chapter 6)

national saving rate: the proportion of GDP that is saved, neither consumed nor spent on government purchases. It equals national saving (S) divided by GDP, or S/Y. It also equals 1 minus the consumption share minus the government purchases share of GDP. (chapter 7)

natural unemployment rate: the unemployment rate that exists in normal times, when there is neither a recession nor a boom and real GDP is equal to potential GDP (chapters 8 and 11)

negatively related: a situation in which an increase in one variable is associated with a decrease in another variable (also called inversely related) (chapter 1)

negative slope: a slope of a curve that is less than zero, representing a negative or inverse relationship between two variables (chapter 1 appendix)

neoclassical growth school: an approach to macroeconomics that uses the aggregate production function and the growth accounting formula in describing long-term growth, emphasising aggregate supply rather than aggregate demand (chapter 18)

net advances: equity sales and repayment of past lending less equity injections/purchases and new lending (chapter 15)

net exports: the value of goods and services sold abroad minus the value of goods and services bought from the rest of the world – that is, exports minus imports (chapters 6 and 20)

net exports share: the proportion of GDP that is equal to net exports. It equals net exports divided by GDP, or X/Y. (chapter 7)

net factor income from abroad: the difference between receipts of factor income from foreign countries and payments of factor income to foreigners (chapter 17)

net foreign assets: the difference between citizens’ net assets held abroad and net assets in the domestic country held by foreigners (chapter 17)

net income from non-residents: the difference between domestic factors of production working abroad and foreign factors of production working at home (chapter 6)

net investment: gross investment minus depreciation (chapter 6)

net national income: the difference between gross national income and depreciation (chapter 6)

net transfers from abroad: the difference between transfer payments received and transfer payments made to other countries (chapter 17)

new classical school: a school of macroeconomics that holds that prices are perfectly flexible, expectations are rational and therefore anticipated monetary policy will have no effect on the economy (chapter 18)

new entrants: people who are unemployed because they just entered the labour force and are still looking for work (chapter 8)

new Keynesian school: a school of macroeconomics that holds that prices are sticky and expectations are rational to explain the effect of monetary and fiscal policy (chapter 18)

newly industrialised country: a country that is growing rapidly and quickly developing its industrial base (chapter 19)

nominal GDP: gross domestic product without any correction for inflation. The same as GDP, it is the value of all goods and services newly produced in a country during some period of time, usually a year. (chapter 6)

nominal interest rate: the interest rate uncorrected for inflation (chapter 5)

nominal rigidities: inflexibilities in wages and prices (chapter 11)

non-bank financial intermediaries (NBFIs): financial institutions such as building societies, credit cooperatives and authorised money market dealers (chapter 10)

non-excludability: the situation in which no-one can be prevented from consuming a good (chapter 9)

non-rivalry: the situation in which more people can consume a good without reducing the amount available for others to consume (chapter 9)

non-tariff barrier: any government action other than a tariff that reduces imports, such as a quota or a standard (chapter 21)

normal good: a good for which demand increases when income rises and decreases when income falls (chapter 3)

normative economics: economic analysis that makes recommendations about economic policy (chapter 1)

North—South problem: the geographic dispersion of incomes whereby northern countries tend to be relatively rich, and southern ones tend to be relatively poor (chapter 19)

official cash rate: the interest rate on cash, which is the medium used to settle debts arising from transactions in the money market (chapter 13)

open market operation: the buying and selling of bonds by the central bank (chapter 16)

opportunity cost: the value of the next-best forgone alternative that was not chosen because something else was chosen (chapters 1, 2 and 20)

organisation: a human structure, such as a family, firm, government or university through which people may exchange goods and services (chapter 2)

outsider: someone who is not working for a particular firm, making it difficult for him or her to get a job with that firm although he or she is willing to work for a lower wage (chapter 8)

paper money: currency made of paper that has no intrinsic value (chapter 10)

part-time worker: someone who works between 1 and 35 hours per week (chapter 8)

Payment System Board: the board responsible for the RBA’s payments system policy (chapter 10)

peak: the highest point in real GDP before a recession (chapter 5)

perfectly elastic demand: demand for which the price elasticity is infinite, indicating an infinite response to a change in the price and therefore a horizontal demand curve (chapter 4)

perfectly elastic supply: supply for which the price elasticity is infinite, indicating an infinite response of quantity supplied to a change in price and thereby a horizontal supply curve (chapter 4)

perfectly inelastic demand: demand for which the price elasticity is zero, indicating no response to a change in price and therefore a vertical demand curve (chapter 4)

perfectly inelastic supply: supply for which the price elasticity is zero, indicating no response of quantity supplied to a change in price and thereby a vertical supply curve (chapter 4)

personal income: income paid directly to individuals. It includes labour income, transfer payments and the part of capital income that is paid out to individuals. (chapter 6)

phase-out: the gradual reduction of a government regulation or trade barrier (chapter 20)

Phillips curve: a downward-sloping relationship between inflation and unemployment. It was originally found by A. W. Phillips in data from the late 1800s and early 1900s. (chapter 10)

policy ineffectiveness proposition: the proposition that anticipated monetary policy will have no effect on the economy (chapter 18)

political business cycle: a business cycle resulting from politicians’ use of fiscal or monetary policy to affect the outcome of an election (chapter 16)

portfolio investment: investment by a foreign entity of less than a 10 per cent ownership share in a firm (chapter 19)

positive economics: economic analysis that explains what happens in the economy and why, without making recommendations about economic policy (chapter 1)

positive slope: a slope of a curve that is greater than zero, representing a positive or direct relationship between two variables (chapter 1 appendix)

positively related: a situation in which an increase in one variable is associated with an increase in another variable (also called directly related) (chapter 1)

post-Keynesian school: a group of economists who believe that market forces cannot guarantee a return to potential GDP, which creates a vital role for the government (chapter 18)

potential GDP: the economy’s long-term growth trend for real GDP determined by the available supply of capital, labour and technology. Real GDP fluctuates above and below potential GDP. (chapters 5 and 11)

precautionary demand for money: money demanded to finance unanticipated transactions (chapter 16)

pre-emptive monetary strike: an interest rate increase in anticipation of a rise in inflation (chapter 16)

price: refers to a particular good and is defined as the amount of money or other goods that one must pay to obtain the good (chapter 3)

price ceiling: a government price control that sets the maximum allowable price for a good (chapter 3)

price control: a government law or regulation that sets or limits the price to be charged for a particular good (chapter 3)

price elasticity of demand: the percentage change in the quantity demanded of a good divided by the percentage change in the price of that good (chapter 4)

price elasticity of supply: the percentage change in quantity supplied divided by the percentage change in price (chapter 4)

price floor: a government price control that sets the minimum allowable price for a good (chapter 3)

price shock: a change in the price of a key commodity such as oil, usually as a result of a shortage, that causes a shift in the inflation adjustment line (also sometimes called a supply shock) (chapter 14)

production function: the relationship that describes output as a function of labour, capital and technology (chapter 5)

production possibilities: alternative combinations of production of various goods that are possible, given the economy’s resources (chapter 2)

production possibilities curve: a curve showing the maximum combinations of production of two goods that are possible, given the economy’s resources and level of technology (chapter 2)

productivity: output per hour of work (chapter 9)

progressive tax: a tax system in which an individual’s tax payments rise as a proportion of income as the individual’s income rises (chapter 15)

property rights: rights over the use, sale and proceeds from a good or resource (chapter 2)

protectionist policy: policy that restricts trade to protect domestic producers (chapter 21)

prudential supervision: a function once carried out by the RBA (and now carried out by the APRA) to ensure that banks have sufficient liquidity and adequate capital to cover losses (chapter 10)

public infrastructure investment: purchases of capital by government for use as public goods, which add to the productive capacity of the economy (chapter 7)

purchasing power parity (PPP): the theory that exchange rates are determined in such a way that the prices of goods in different countries are the same when measured in the same currency (chapter 17)

purchasing power parity exchange rate: an exchange rate such that the prices of similar goods in different countries are the same when measured in the same currency (chapter 6)

quantity demanded: the amount of a good that people want to buy at a given price (chapter 3)

quantity supplied: the amount of a good that firms are willing to sell at a given price (chapter 3)

quantity theory of money: the equation relating the price level and real GDP to the quantity of money and the velocity of money – that is, the quantity of money times its velocity equals the price level times real GDP. In terms of growth rates it states that money growth plus velocity growth equals inflation plus real GDP growth. (chapter 10)

quota: an upper limit on the quantity of a good that may be imported or sold (chapter 21)

rational expectations revolution: a change in macroeconomic thinking during the 1970s based on the assumption that people make rational, forward-looking decisions using all the information available to them (chapter 18)

real business cycle school: a group of economists who believe that shifts in potential GDP, largely due to changes in technology, are the primary cause of economic fluctuations (chapter 18)

real business cycle theory: a theory of macroeconomics that stresses that shifts in potential GDP are a primary cause of fluctuations in real GDP. The shifts in potential GDP are usually caused by changes in technology (chapters 11 and 14)

real exchange rate: a measure of the exchange rate between two currencies that is adjusted for differences in inflation levels in the two countries (chapter 17)

real gross domestic product (real GDP): a measure of the value of all the goods and services newly produced in a country during some period of time, adjusted for inflation (chapters 5 and 6)

real interest rate: the interest rate minus the expected rate of inflation. It adjusts the nominal interest rate for inflation (chapter 5)

real wage: the nominal wage adjusted for inflation. It is calculated by dividing the wage by the price level. (chapter 8)

recession: a decline in real GDP that lasts for at least six months (chapter 5)

recovery: the early part of an economic expansion, immediately after the trough of the recession (chapter 5)

reinflation: an increase in the inflation rate caused by a change in monetary policy (chapter 14)

relatively elastic: a situation in which the elasticity of one good is greater than the elasticity of another good (chapter 4)

rent control: a government price control that sets the maximum allowable rent on a house or apartment (chapter 3)

research and development (R & D): activities designed to further scientific knowledge and develop new products (chapter 9)

Reserve Bank Board: the board that runs the day-to-day business of the RBA. The Secretary of the Treasury is a member of this board. (chapter 10)

Reserve Bank of Australia (RBA): the central bank of Australia which oversees the creation of money in Australia (chapter 10)

reserve ratio: the fraction of a bank’s deposits that it is required to hold at the central bank (chapter 10)

reserves: deposits that commercial banks hold at the central bank (chapter 10)

residential investment: purchases of new houses and apartment buildings (chapter 6)

revenue tariff: an import tax whose main purpose is to provide revenue to the government (chapter 21)

savings deposit: an account that is very liquid but generally cannot be easily used for transactions (chapter 10)

scarcity: the situation in which the quantity of resources is insufficient to meet all wants (chapter 2)

seasonal adjustment: the process whereby the effect of seasonal variation is removed from economic data (chapter 8)

seasonal unemployment: unemployment that varies with the seasons of the year as a result of seasonal fluctuations in supply or demand for labour (chapter 8)

sectoral trade balance: the value of exports less the value of imports in a particular sector or industry (chapter 17)

seigniorage: the profit earned by central banks from issuing notes. It arises because the nominal value of notes is substantially greater than their cost of production. (chapter 10)

services trade: trade in services, or things that do not have a physical form, such as consulting or telecommmunications (chapter 17)

services trade balance: the value of services exports minus the value of services imports (chapter 17)

shift of the curve: a change in the position of a curve usually caused by a change in a variable not represented on either axis (chapter 1 appendix)

shortage: the situation in which quantity demanded is greater than quantity supplied (chapter 3)

slope: refers to a curve and is defined as the change in the variable on the vertical axis divided by the change in the variable on the horizontal axis (chapter 1 appendix)

specialisation: the situation in which a resource, such as labour, concentrates and develops efficiency at a particular task (chapter 2)

specific tariff: a tax on inputs that is proportional to the number of units or items imported (chapter 21)

speculative demand for money: money demanded to finance speculation on asset prices (chapter 16)

spending balance: the level of income or real GDP at which the 45-degree line and the aggregate expenditure line cross (also called equilibrium income) (chapter 11)

stagflation: the situation in which high inflation and high unemployment occur simultaneously (chapter 14)

sticky price assumption: an assumption that prices do not move quickly in response to a change in supply or demand. The assumption is used in the theory of economic fluctuations. (chapter 11)

store of value: something that will allow purchasing power to be carried from one period to the next (chapter 10)

strategic trade policy: a set of government actions designed to encourage large firms to locate or start up in that country (chapter 21)

structural surplus: the level of the government budget surplus under the scenario where real GDP is equal to potential GDP (also called the full-employment surplus) (chapter 15)

structural unemployment: long-term unemployment due to structural problems such as poor skills or longer-term changes in demand or insufficient work incentives (chapter 8)

subsistence line: a line representing the minimum amount of production the population needs to survive or subsist (chapter 9)

substitute: a good that has many of the same characteristics and can be used in place of another good (chapter 3)

supply: a relationship between price and quantity supplied (chapter 3)

supply curve: a graph of supply showing the upward-sloping relationship between price and quantity supplied (chapter 3)

supply schedule: a tabular presentation of supply showing the price and quantity supplied of a particular good, all else being equal (chapter 3)

supply-side economics: the branch of economics that emphasises that reducing marginal tax rates on investments and labour will increase aggregate supply, thereby stimulating the macroeconomy (chapter 18)

surplus: the situation in which quantity supplied is greater than quantity demanded (chapter 3)

tap system: a system of selling government bonds whereby the government sets interest on the bonds and issues the amount dictated by market demand (chapter 16)

target inflation rate: the central bank’s goal for the average rate of inflation over the long run (chapter 13)

tariff: a tax on imports (chapter 20)

tax rate: the percentage of income or the value of a good paid to the government in the form of taxes (chapter 12)

tax revenue: the total amount the government receives in the form of taxes. It equals the tax rate times income (also called taxes). (chapter 12)

technological change: improvement in technology over time (chapter 9)

technology: anything that raises the amount of output that can be produced with a given amount of labour and capital (chapters 5 and 9)

tender system: a system of selling government bonds whereby the amount of bonds necessary to meet all financing requirements is sold at the interest rate determined by the market (chapter 16)

term (or time) deposit: an account that requires that the money be left in the account for a specified period (chapter 10)

terms of trade: quantity of imported goods a country can obtain in exchange for a unit of exported goods (chapter 20)

thinking at the margin: thinking about the costs and benefits of making changes in behaviour (chapter 1)

time inconsistency: the situation where policy makers have the incentive to announce one economic policy, but then change that policy after citizens have acted on the initial, stated policy (chapter 16)

tradable goods: goods for which transportation costs are not prohibitive (chapter 17)

trade adjustment assistance: transfer payments made to workers who will be hurt by the move to free trade (chapter 20)

trade balance: the value of exports minus the value of imports (chapter 6)

trade creation: the increase in trade due to a decrease in trade barriers (chapter 21)

trade diversion: the shifting of trade away from the low-cost producer towards a higher-cost producer as a result of a reduction in trade barriers with the country of the higher-cost producer (chapter 21)

trade war: a conflict among nations over trade policies caused by imposition of protectionist policies on the part of one country and subsequent retaliatory actions by other countries (chapter 21)

transaction cost: the cost of buying or selling in a market including the cost of searching, bargaining and writing contracts (chapter 2)

transactions demand for money: money demanded to pay for current transactions (chapter 16)

transfer price: a price that one department of an organisation must pay to receive goods or services from another department in the same organisation (chapter 2)

trough: the lowest point of real GDP at the end of a recession (chapter 5)

twin deficits: a situation in which a government budget deficit and an international trade deficit occur simultaneously (chapter 12)

underlying deficit/surplus: the difference between revenue and spending unadjusted for net advances (chapter 15)

unemployment rate: the percentage of the labour force that is unemployed – that is, the ratio of unemployed workers to the labour force (chapters 5 and 8)

unilateral disarmament: in trade policy, the removal of trade barriers by one country without reciprocal action on the part of other countries (chapter 21)

unit elastic demand: demand for which price elasticity equals 1 (chapter 4)

unit of account: a standard unit in which prices can be quoted and values of goods can be compared (chapter 10)

unit-free measure: a measure that does not depend on a unit of measurement (chapter 4)

Uruguay Round: the most recent round of negotiations on the GATT, begun in 1986 in Uruguay (chapter 21)

value added: the value of the firm’s production minus the value of the intermediate goods used in production (chapter 6)

velocity: a measure of how fast money is turned over in the economy. Velocity equals nominal GDP divided by the money supply. (chapter 10)

voluntary export restriction (VER): a country’s self-imposed government restriction on exports to a particular country (chapter 21)

working-age population: persons over 15 years of age who are not in an institution such as a jail or hospital (chapter 8)

World Bank: an international agency, established after World War II, designed to promote the economic development of poorer countries through lending channelled from industrialised countries (chapter 19)

world price: the given price of an internationally traded good determined by the global market (chapter 21)

World Trade Organization (WTO): an international organisation that can mediate trade disputes (chapter 21)