Essential Economics Definitions
Macro Variables
Macro Variables are the key measures for assessing the overall health of a country’s economy. They represent economic activity and the sums of economic variables.
- GDP
- Labour Market
- Inflation Rate
- Interest Rate
- Government Expenditure
- Exchange Rates
- Balance of Payments
Final Good
A final good is an item bought by its final user during a period of time.
Intermediate Good
An intermediate good is an item produced by one firm, bought by another firm, and used as a component of a final good or service.
Nominal GDP
Nominal GDP is the value of final goods and services produced in a given year, valued at the prices of that year.
Real GDP
Real GDP is the value of final goods and services produced in a given year, valued at the prices of a reference year.
Labour Market
The labour market represents the supply and demand for labour in an economy.
Interest Rates
Interest rates represent the price of borrowing money and the return received from savings.
Consumption Expenditure
Consumption expenditure is money spent by households on final goods and services.
Fiscal Policy
Fiscal policy involves the use of government spending and taxation to influence economic activity and achieve economic goals.
Money and Finance
Means of Payment
A means of payment is a method of settling a debt. When a payment has been made, there is no remaining obligation between the parties to a transaction.
M1
M1 is an official measure of money. It includes currency and traveler’s checks plus checking deposits owned by individuals and businesses.
M2
M2 consists of M1 plus time deposits, savings deposits, money market mutual funds, and other deposits.
Depository Institutions
Depository institutions are financial firms that accept deposits from households and firms. They earn money by investing these deposits.
Thrift Institutions
Thrift institutions are organizations formed for receiving deposits for consumer savings. Consumers are paid interest. Examples include Savings and Loan institutions and credit unions.
Savings Banks
Savings banks are depository institutions that accept savings deposits and make mostly home purchase loans.
Credit Unions
Credit unions are depository institutions owned by a social or economic group, such as firm employees, that accept deposits for giving personal loans.
Liquid Assets
Liquid assets are overnight loans to other financial institutions. They are the most easily accessible resource in case more reserves are needed.
Loans
Loans are funds committed for an agreed-upon period of time to corporations to finance investments and to households to finance the purchase of homes, cars, and other durable goods.
Federal Funds Rate
The federal funds rate is the rate that banks charge each other for overnight loans.
Savings and Loan Institutions
Savings and Loan institutions are depository institutions that receive deposits and make loans. They are smaller than commercial banks.
Fiscal Policy and Taxes
Discretionary Fiscal Policies
Discretionary fiscal policies are policies applied by governments when they intentionally want to influence revenues or expenditures.
Expansionary Fiscal Policies
Expansionary fiscal policies are a government strategy aimed at stimulating economic growth and reducing unemployment by increasing government spending, decreasing taxes, or both.
Restrictive Fiscal Policies
Restrictive fiscal policies work in the opposite direction of expansionary fiscal policies by reducing public spending and raising taxes.
State Budget
A state budget is a forecast of a country’s expenditures and income, based on the actions, plans, and sources of financing of the state.
Subsidies
Subsidies are similar to transfers but are given to firms that have the obligation to carry out a certain behavior.
Taxes
Taxes are payments levied by governments without the taxpayer receiving anything in return.
Direct Taxes
Direct taxes are levied on what is earned or owned.
Indirect Taxes
Indirect taxes tax certain acts, such as the transfer of goods or consumption.
Fees
Fees are payments to the government in exchange for the use of a public service or activity that provides a benefit (e.g., EVAU).
Income Tax
Income tax is levied on individuals and businesses based on their earnings and profits.