GLOSSARY
	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) 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 simply called 'income' (chapter 11) aggregate saving: national saving plus foreign saving (chapter 6) aggregate saving rate: the proportion of GDP that is saved by either domestic or overseas residents, and so is not spent on consumption, government expenditure or net exports. It equals aggregate saving (S) divided by GDP, or S/Y. (chapter 7) 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) 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) automatic stabilisers: automatic tax and spending changes that occur over the course of the business cycle and that tend to stabilise the fluctuations in real GDP (chapter 15) 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 expenditure when the change in government expenditure is matched by an equivalent change in taxes (chapter 12) 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) black market: a market in which goods and services are illegally traded at prices above the price ceiling (chapter 3) 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) 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: that which enables the production of goods and services now and in the future (chapter 2) capital: the factories, improvements to cultivated land, machinery and other tools, equipment and structures used to produce goods and services (chapter 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 adequacy ratio: a requirement that banks maintain a certain ratio of shareholder funds and capital reserves to the total value of their financial assets weighted by risk (chapter 10) 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 reserve ratio: ratio of a bank's cash reserves to its deposits (chapter 10) cash reserves: the value of cash held by the bank either in its branches or at the central bank (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) ceteris paribus: all other things being equal. The term refers to holding all other variables constant or keeping all other things the same when one variable is changed. (chapter 1) chequeable deposits: deposits of funds on which cheques can be written (chapter 10) choice: a selection among alternative goods, services or actions (chapter 2) Closer Economic Relations (CER): an agreement moving Australia and New Zealand towards greater free trade with each other since 1983 (chapter 20) 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) collateral: an asset owned by a borrower that becomes the property of the bank if the borrower defaults on its loan (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 expenditure, taxes or some other variable that affects the forecast (chapter 11) 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; 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 expenditure (chapter 7) Crown entity (CE): an agency set up by the government for a particular purpose (chapter 15) 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 deposits: chequeable deposits and EFTPOS accessible deposits (chapter 10) 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 net amount of outstanding loans the 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) 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 by which 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; it is set by employers in order to increase worker efficiency, for example, by decreasing shirking by workers (chapter 8) EFTPOS accessible deposits: deposits of funds that can be used for electronic funds transfer at the point of sale (chapter 10) 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) emerging market economies: former centrally planned economies making the transition to market economies and developing economies that have recently reduced restrictions on international trade (chapter 5) 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) expansion: the period between the trough of a recession and the next peak, consisting of a general rise in output and employment (chapter 5) expenditure on GDP: the aggregate value of all final expenditure by domestic and overseas residents on goods and services produced in New Zealand (chapter 6) 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 Reserve System: the central bank of the United States, which oversees the creation of money in the United States (chapter 10) final good: a new good that undergoes no further processing before it is sold to consumers (chapter 6) financial security: a promise by a firm or government to pay a certain amount of money to the security holder on a fixed date in the future (chapter 10) 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) foreign saving: net investment income paid to the rest of the world minus net exports (chapter 6) free trade: a complete lack of restrictions on international trade (chapter 20) 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) full-time-equivalent employment: the number of full-time workers plus 0.5 times the number of part-time workers (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 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 agreement negotiated in 1947 to encourage lower barriers to international trade (chapter 20) gold standard: a monetary standard in which the value of paper money is linked to gold (chapter 10) government budget: a summary of the central government's planned revenue and expenses for the next fiscal year (chapter 15) government expenditure: spending by central and local government on final consumption goods and services (chapter 6) government expenditure share: the proportion of GDP that is used for government expenditure; equals government expenditure 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 expenditure (GNE): the sum of consumption plus investment plus government purchases (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) growth accounting formula: growth rate of real GDP per hour of work = (growth rate of capital per hour of work) + (growth rate of technology)(chapter 19) hedge: to reduce risk, usually by buying a futures contract to guarantee a price several months in the future (chapter 17) Household Labour Force Survey: a quarterly survey of a sample of New Zealand households carried out by Statistics New Zealand; it measures employment, unemployment, the labour force and other characteristics of New Zealand's working-age population (chapter 8) 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) 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 GST, 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) inferior good: a good for which demand decreases when income rises and increases when income falls (chapter 3) inflation adjustment (IA) line: a line showing how the level of inflation in the economy at any point of time is related to departures of real GDP from potential GDP. It is flat for most of the relevant range, but curves upwards once well beyond potential GDP. (chapter 13) inflation rate: the percentage increase in the overall price level over a given period of time, usually one year (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 lent 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 very different interest rates from 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: outlays of producers on fixed assets, as well as changes to the value of inventories held by businesses (chapter 6) investment-saving gap: the difference between investment and national saving, which must equal the current account deficit (chapter 17) investment share: the proportion of GDP that is used for investment; equals investment divided by GDP, or I/Y. Sometimes called investment rate. (chapter 7) iron law of wages: the prediction that wages will always tend to equal the subsistence level (chapter 9) 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 in which 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 in which 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) jobless workers: workers without employment who were either available for work or had actively sought work in the previous four weeks (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 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) loan: an interest-bearing asset to the bank that lends money to an individual or firm (chapter 10) M1: currency held by the public plus chequeable deposits (chapter 10) M2: M1 plus all non-chequeable EFTPOS accessible balances (chapter 10) M3: cash held by the public plus all deposits held at qualifying financial institutions (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 because 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 by firms and households and the way 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: currency in circulation plus the deposits of banks held at the RBNZ (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) 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) 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 income: gross domestic product less net investment income paid to the rest of the world (chapter 6) national saving: national income minus consumption minus government expenditure (chapter 6) 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 7, 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) 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 exports: the value of goods and services sold abroad minus the value of goods and services bought from the rest of the world; exports minus imports (chapters 6 and 20) net exports share: the proportion of GDP that is equal to net exports; 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 investment: gross investment minus 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) New Zealand System of National Accounts (NZSNA): official government tabulation of the components of GDP and aggregate income (chapter 6) 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; 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-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) 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: refers to 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 (OCR): the average rate of interest at which the Reserve Bank will either lend funds to, or accept funds from, eligible financial institutions (chapters 10, 13 and 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) Ottawa Agreement: a trade agreement signed in 1932 by several countries in the British Commonwealth (chapter 20) 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) overdraft: the right for a bank customer to write cheques to an agreed amount in excess of the value of the customer's deposits (chapter 10) overnight cash rate: the rate of interest for lending or borrowing funds overnight in the money market (chapter 16) paper money: currency made of paper that has no intrinsic value (chapter 10) part-time worker: someone who works between 1 and 30 hours per week (chapter 8) 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) phase-out: the gradual reduction of a government regulation or trade barrier (chapter 20) Phillips curve: a downward-sloping relationship between inflation and unemployment; 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) policy targets agreement (PTA): agreement signed by the RBNZ governor and by the government's treasurer setting out the target range for inflation (chapter 10) 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) 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) 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) 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 level: the average level of prices in the economy (chapter 6) price shock: a change in the price of a key commodity such as oil, usually because 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 slowdown: the experience of lower labour productivity growth after the large oil price shock of 1973 (chapter 5) 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) prudential supervision: a function of the Reserve Bank to ensure a sound banking system (chapter 10) public debt: the total amount of outstanding loans owed by the government (chapter 15) 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) quantity equation of money: the equation relating the price level and real GDP to the quantity of money and the velocity of money: 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) 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 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 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 (chapter 5) 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 asset ratio: the value of a bank's reserve assets divided by the value of its deposits (chapter 10) reserve assets: the liquid financial assets held by a bank to support its main liability of deposits (chapter 10) Reserve Bank Board: directors appointed by the government to monitor the performance of the RBNZ (chapter 10) Reserve Bank of New Zealand (RBNZ): the central bank of New Zealand which oversees the creation of money in New Zealand (chapter 10) residential investment: purchases of new houses and apartment buildings (chapter 6) scarcity: the situation in which the quantity of resources is insufficient to meet all wants (chapter 2) seasonal unemployment: unemployment that varies with the seasons of the year due to seasonal fluctuations in supply or demand for labour (chapter 8) seigniorage: the interest received by a central bank on the financial securities it has purchased by supplying currency to the economy (chapter 10) services trade: trade in services, or things that do not have a physical form, such as consulting or telecommunications (chapter 17) services trade balance: the value of services exports minus the value of services imports (chapter 17) settlement accounts: funds held by each bank at the Reserve Bank to settle their net obligations to each other (chapter 10) shortage: the situation in which quantity demanded is greater than quantity supplied (chapter 3) specialisation: the situation in which a resource, such as labour, concentrates and develops efficiency at a particular task (chapter 2) 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) state-owned enterprise (SOE): a company owned by the government, but operated independently (chapter 15) statistical discrepancy: the difference between calculations of GDP using the spending approach and the income approach due to unreported data or errors in data collection (chapter 6) 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) 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 of, 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) supply-side shock: an event such as a drought or sharp increase in the cost of imported oil that causes a sudden change in the economy's potential GDP (chapter 5) surplus: the situation in which quantity supplied is greater than quantity demanded (chapter 3) 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; equals the tax rate times income (also simply 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) term (or time) deposits: bank account balances that require the money to be left in the account for a specified period of time (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 small changes in behaviour (chapter 1) time inconsistency: the situation in which 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 disadvantaged by the move to free trade (chapter 20) trade balance: the value of exports minus the value of imports (chapter 6) transaction cost: the cost of buying or selling in a market including the cost of searching, bargaining and writing contracts (chapter 2) 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) transition phase: the period of time during which an economy implements comprehensive market-based reforms (chapter 5) trough: the lowest point of real GDP at the end of a recession (chapter 5) twin deficits: a term referring to a situation in which a government budget deficit and an international trade deficit occur simultaneously (chapter 12) unemployment rate: the percentage of the labour force that is unemployed (chapters 5 and 8) 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) 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) 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)