EcoGloss -- Glossary of terms used in economics (R-Z)

EcoGloss -- A Glossary of Terms Used in Economics

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Rate of return regulation: A regulation that determines a regulated price by setting the price at a level that enables the regulated firm to earn a specified target percent return on its capital.
Rational expectations: Market participants intuitively anticipate systemic policy actions and their consequences for the economy; thus, on average, private market forecasts are accurate and planned policy is ineffectual.
Rational ignorance: The decision not to acquire information because the cost of doing so exceeds the expected benefit.
Rationing device: A rationing device is a mechanism or institution which assists in distributing products or resources to the users of those items. The rationing device may be governmentally-controlled, may exist because of tradition or custom, or may be based on markets and prices.
Real balances effect: The tendency for increases in the price level to lower the real value (purchasing power) of financial assets with a fixed money value and, as a result, to reduce total spending and real output (and conversely for decreases in the price level)
Real business cycle theory: A theory that regards random fluctuations in productivity as the main source of economic fluctuations within the business cycle.
Real Gross Domestic Product (real GDP): Real Gross Domestic Product (real GDP) is the value of total production of all the nation's farms, factories, shops, and offices linked back to the prices of a single year. It is calculated as GDP in the base year scaled up by the growth rate of real GDP since the base year.
Real income: Real income is measured by the quantity of a good that consumer's income will buy. It is the consumer's income expressed in units of a good and is calculated as income divided by the price of the good.
Real interest rate: The nominal interest rate adjusted for inflation; the nominal interest rate minus the inflation rate.
Real wage rate: Real wage rate is the quantity of goods and services that an hour's work can buy.
Recession: A recession is a business cycle phase in which real GDP decreases for at least two successive quarters. A recession follows a peak and precedes a trough. A recession is the opposite of an expansion (or recovery) in the cycle.
Recessionary gap: Recessionary gap is the amount by which potential GDP falls short of real GDP. This is caused by actual expenditures in the economy being below the full employment level of expenditures.
Recovery: A recovery is a business cycle phase in which real GDP increases. A recovery follows a trough and precedes a peak. A recovery is the opposite of a recession. A recovery may also be known as an expansion in the cycle.
Reentrants: Reentrants are people who reenter the labor force.
Regressive income tax: A tax on income at a marginal rate that decreases with the level of income.
Regressive tax: A tax for which high-income taxpayers pay a smaller fraction of their income than do low-income taxpayers.
Regulation: Rules administrated by a government agency to influence economic activity by determining prices, product standards and types, and conditions under which new firms may enter an industry.
Relative price: Relative price is the ratio of the price of one good or service to the price of another good or service. A relative price is an opportunity cost.
Rent: Rent is the earnings derived through the sale of the resource known as land. Rent is included in the total costs of the firm and is a source of income for the household. The total rent earned in a nation over the course of a year is included in that nation's gross domestic product (GDP).
Rent ceiling: A rent ceiling is a regulation that makes it illegal to charge a rent higher than a specified level.
Rent seeking: Rent seeking is the activity of trying to obtain a monopoly from which an economic profit can be made.
Repurchase agreements: An agreement by which, for example, the Federal Reserve purchases a security for immediate delivery and receives interest at a specific rate from a government securities dealer, with an agreement to sell the security back at the same price by a specific date (usually within 15 days). This arrangement allows the Federal Reserve to inject reserves into the banking system on a temporary basis to meet a temporary need and to withdraw these reserves as soon as that need has passed.
Required clearing balance: Amount kept by a depository institution in an account at a Federal Reserve Bank, in addition to its required reserve balance, to ensure that it can meet its daily transaction obligations without overdrawing its required reserve account and thereby incurring a penalty. Required clearing balances earn credits that can be used to pay for services provided by the Federal Reserve.
Required reserve balance: Portion of its required reserves that a depository institution must hold in an account at a Federal Reserve Bank.
Required reserve ratio: The required reserve ratio is the ratio of reserves to deposits that banks are required, by regulation, to hold.
Required reserves: Funds that a depository institution is required to maintain as vault cash or on deposit with a Federal Reserve Bank; required amount varies according to required reserve ratios set by the Board of Governors and the volume of reservable liabilities held by the institution.
Reservation price: The highest price that a buyer is willing to pay for a good.
Reserve ratio: The fraction of a bank’s total deposits that are held in reserves.
Reserves: Reserves are a depository institution's vault cash (up to the level of its required reserves) plus balances in its reserve account (not including funds applied to its required clearing balance) and other deposits at Federal Reserve banks.
Resources: The economy's resources are land, labor, capital, and entrepreneurship. Resources are also called "productive resources" or "factors of production".
Return: See yield.
Returns to scale: Returns to scale are the increase in output that results when a firm increases all its inputs by the same percentage. Returns to scale may be constant, decreasing, or increasing.
Right-to-Work laws: Laws banning union membership as a requirement for continued employment.
Risk: A situation in which more than one outcome might occur and the probability of each possible outcome can be estimated.
Rivalness: The property of a good that one person's use diminishes other people's use.

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Sacrifice ratio: The number of percentage points of annual output that is lost in the process of reducing inflation by one percentage point.
Saving: Saving is the amount of income remaining after meeting consumption expenditures.
Saving function: The saving function is the functional relationship between saving and disposable income, ceteris paribus.
Saving schedule: A schedule showing the various amounts that households plan to save (not spend on consumer goods) at different levels of disposable income, ceteris paribus.
Savings and loan association (S&L): Historically, a depository institution which accepted deposits mainly from individuals and invested heavily in residential mortgage loans. Although still primarily residential lenders, S&Ls may now offer checking-type deposits and make a wider range of loans, such as personal and commercial loans.
Savings bank: Historically, a depository institution which engaged primarily in accepting consumer savings deposits and in originating and investing in securities and residential mortgage loans. Today, savings banks may offer checking-type deposits and make a wider range of loans.
Saving supply: The relationship between saving and the real interest rate, other things remaining the same.
Scarcity: Scarcity is the state in which the freely-available resources in an economy are insufficient to satisfy the wants of everyone in that economy. Scarcity is the central economic problem -- it leads to the fact that choices have to be made and those choices have an opportunity cost associated with them.
Scatter diagram: A scatter diagram is a graph that plots the value of one economic variable against the value of another.
Search activity: Search activity is the time spent looking for someone with whom to do business.
Securities and Exchange Commission (SEC): An independent, non-partisan, quasi-judicial regulatory agency with responsibility for administering the federal securities laws. The purpose of these laws is to protect investors and to ensure that investors have access to disclosure of all material information concerning publicly traded securities. The Commission also regulates firms engaged in the purchase or sale of securities, people who provide investment advice, and investment companies.
Securities: Paper certificates (definitive securities) or electronic records (book-entry securities) evidencing ownership of equity (stocks) or debt obligations (bonds).
Security interest: The property or a portion of property offered as security.
Seigniorage: The profit which results from the difference between the cost of making coins and currency and the exchange value of coin and currency in the market.
Service: A service is a non-tangible product which may be produced and consumed. When people consume a service, they gain satisfaction, or utility. Compare with good; contrast with bad.
Shortage (excess demand): A condition in which quantity demanded is greater than quantity supplied. A shortage occurs only at prices below equilibrium price in the market and is a state of market disequilibrium. Contrast with surplus.
Short-run: Short-run in microeconomics has two meanings. For a firm, it is the period of time in which the quantity of at least one of its inputs is fixed and the quantities of the other inputs can be varied. The fixed input is usually capital -- that is, the firm has a given plant size. For an industry, it is the period of time in which no firms either enter nor exit the market and in which all firms are in their own short-run (see above).
Short-run aggregate supply curve: The short-run aggregate supply curve is the relationship between the quantity of real GDP supplied and the price level in the short run when the money wage rate, other resource prices, and potential GDP remain the same.
Short-run industry supply curve: The short-run industry supply curve is a curve that shows how the quantity supplied by the industry at each price varies when the plant size of each firm and the number of firms in the industry remain the same.
Short-run macroeconomic equilibrium: Short-run macroeconomic equilibrium is a situation that occurs when the quantity of real GDP demanded equals the quantity of real GDP supplied -- at the point of intersection of the aggregate demand (AD) curve and the short-run aggregate supply curve (SAS).
Short-run Phillips curve: A curve that shows the relationship between inflation and unemployment, when the expected inflation rate and the natural rate of unemployment remain the same.
Shutdown point: The shutdown point is the output and price at which the firm just covers its total variable cost. In the short-run, the firm is indifferent between producing the profit-maximizing output and shutting down temporarily.
Signal: An action taken outside a market that conveys information that can be used by that market.
Single-price monopoly: A single-price monopoly is a monopoly that sells each unit of its output for the same price.
Slope: Slope of a line is the change in the value of the variable measured on the vertical axis (y-axis) divided by the change in the value of the variable measured on the horizontal axis (x-axis). Generally, this means that you measure the slope by dividing "rise over run".
Special drawing rights - SDR: A type of international money created by the International Monetary Fund (IMF) and allocated to its member nations. SDRs are an international reserve asset, although they are only accounting entries (not actual coin or paper, and not backed by precious metal). Subject to certain conditions of the IMF, a nation that has a balance of payments deficit can use SDRs to settle debts to another nation or to the IMF.
Specialization: The condition in which resources are primarily devoted to specific tasks, based on their comparative advantage in those tasks. This is a fundamental concept in the study of economics as limited resources can be more effectively used in the production of products to satisfy unlimited wants and needs if those resources specialize.
Stabilization policies: Economic policies undertaken by government to counteract fluctuations in the business cycle and prevent high unemployment rates and inflation. These are also termed counter-cyclical policies. To counter a business cycle contraction and high rates of unemployment, policies that promote increasing economic activity are appropriate, such as expansionary fiscal policy or expansionary monetary policy. To counter an inflationary expansion, contractionary policies are recommended, such as contractionary fiscal policy or contractionary monetary policy.
Stagflation: The combination of a rise in the price level, slow growth (or a decrease) in real GDP, and high unemployment.
Stock: A quantity that exists at a point in time.
Store of value: An item that people can use to transfer purchasing power from the present to the future.
Strategies: All the possible actions of each player in a game.
Strike: The organized withdrawal of labor from a firm by a union.
Structural deficit: A structural deficit is a budget that is in deficit when real GDP equals potential GDP; expenditures exceed tax revenues.
Structural surplus or deficit: The budget balance that would occur if the economy were at full employment and real GDP equaled potential GDP.
Structural unemployment: Structural unemployment is the unemployment that arises when changes in technology or international competition change the skills needed to perform jobs or change the locations of jobs. Generally, structural unemployment tends to be longer-term in nature. Contrast with frictional unemployment.
Subsidy: A payment made by the government to producers that depends on the level of output.
Subsistence real wage rate: The subsistence real wage rate is the minimum real wage rate needed to maintain life.
Substitute: A substitute is a product which can be used in place of another product. With substitutes, the demand for one rises as the price of the other rises (or, the demand for one falls as the price of the other falls). A direct relationship exists between changes in the price of one good and changes in the demand for another good (its substitute). Goods which have a positive cross price elasticity of demand are substitutes. Contrast with complement.
Substitution effect: A substitution effect is the effect of a change in price on the quantities consumed when the consumer (hypothetically) remains indifferent between the original and the new combinations of goods consumed.
Sunk cost: A cost that has been incurred in the past and cannot be reversed now.
Supply: Supply is defined as a schedule of various prices and quantities of a product which producers are willing and able to produce and sell during a period of time, ceteris paribus.
It is described by a supply schedule and illustrated by a supply curve. A change in the price of the product will cause a change in quantity supplied while a change in one of the determinants of supply will cause a change in supply.
Supply curve: A supply curve is a curve that shows the relationship between the quantity supplied and the price of a good when all other influences on producers' planned sales remain the same. It is based on the supply schedule of prices and quantities supplied. It is based on the supply schedule of prices and quantities supplied.
Supply-management policies: Government policies designed to stabilize the economy by changing aggregate supply. Some noted supply-management policies are deregulation, education, technology, and investment all designed to improve the productive capabilities of the economy's resources.
Supply of labor: The relationship between the quantity of labor supplied and the real wage rate when all other influences on work plans remain the same.
Supply shock: A disruption of market equilibrium caused by a change in a supply determinant and a shift of the supply curve. A supply shock can take one of two forms -- a supply increase or a supply decrease. An increase in supply is illustrated by a rightward shift of the supply curve and results in an increase in equilibrium quantity and a decrease in equilibrium price. A decrease in supply is illustrated by a leftward shift of the supply curve and results in a decrease in equilibrium quantity and an increase in equilibrium price.
Surplus (excess supply): A condition in which quantity supplied is greater than quantity demanded. A surplus occurs only at prices above equilibrium price in the market and is a state of market disequilibrium. Contrast with shortage.
Symmetry principle: A principle that states that people in similar situations must be treated similarly.

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Tariff: A tax on imports.
Tax: Any sort of forced or coerced payment to government. The primary reason government collects taxes is to get the revenue needed to finance public goods and pay administrative expenses. However, the more astute leaders of the first estate have recognized over the years that taxes have other effects, including (1) redirecting resources from one good to another and (2) altering the total amount of production in the economy. As such, taxes have been used to correct market failures, equalize the income distribution, achieve efficiency, stabilize business cycles, and promote economic growth.
Tax incidence: The ultimate payment of a tax. Many taxes are initially paid by one person, but passed along through production and consumption activities until it finally reaches someone else. An obvious example is the sales tax. While officially paid by the retail store (they write the check to the government), it's tacked on to the prices paid by consumers. Consumers, thus, bear the lion's share of most sales taxes. The incidence of other taxes is not quite so obvious. Some taxes are paid by producers early in production such as severance taxes on oil extraction without the knowledge of consumers, who end up paying through higher prices. As a general rule taxes are passed through the system until they reach someone (usually consumers) who can pass it no further.
Technical efficiency: A situation that occurs when it is not possible to increase output without increasing inputs. An implication of technical efficiency is that the best job possible of combining resources to produce products is attained and that there are no wasted resources. Production is occurring at the lowest possible opportunity cost. Contrast with allocative efficiency.
Technology: Technology is any method of producing a good or service. Technology may be viewed as the recipe used in combining resources in the production process.
Terms of trade: The quantity of goods and services that a country exports to pay for its imports of goods and services.
Theory: An abstract representation of the real world designed with the intent to better understand that world. The goal of a theory is to predict or explain events and are judged largely on the basis of how well they achieve this goal.
Thrift institutions: Thrift institutions include savings and loan associations, savings banks, and credit unions.
Tie-in sale: A sale whereby one product can be purchased only if another product is also purchased.
Time-series graph: A time-series graph is a graph that measures time (for example, months or years) on the x-axis and the variable or variables in which we are interested on the y-axis.
Total cost: Total cost is the cost of all the productive resources that a firm uses. In the short-run it is equal to total fixed cost plus total variable cost.
Total fixed cost: Total fixed cost is the cost of all the fixed inputs. Total fixed cost does not vary in the short-run.
Total product: Total product is the total output produced by a firm in a given period of time.
Total revenue: Total revenue is the value of a firm's sales. Total revenue is calculated as the price of the good multiplied by the quantity of the good sold.
Total revenue test: The total revenue test is a method of estimating the price elasticity of demand by observing the change in total revenue that results from a change in the price, when all other influences on the quantity sold remain the same.
Total utility: Total utility is the total benefit that a person gets from the consumption of goods and services.
Total variable cost: Total variable cost is the cost of all the variable inputs.
Tradeoff: A tradeoff is a constraint that involves giving up one thing to get something else.
Tragedy of the Commons: A parable that illustrates why common resources get used more than is desirable from the standpoint of society as a whole.
Transactions costs: The cost incurred in searching for someone with whom to do business, reaching an agreement about the price and other aspects of the exchange, and ensuring that the terms of the agreement are fulfilled.
Transitivity: The principle whereby if A is preferred to B, and B is preferred to C, then A is preferred to C.
Treasury bill: A short-term direct obligation of the U.S. Treasury (maturities of 13, 26, or 52 weeks). Sales of new Treasury bills to the public were suspended on Tuesday, February 27, 2001, following their auction on that date. See also Treasury note and Treasury bond.
Treasury bond: A long-term obligation of the U.S. Treasury (more than 10 years' maturity). See also Treasury bill and Treasury note.
Treasury note: A medium-term obligation of the U.S. Treasury; 2-10 years' maturity. See also Treasury bill and Treasury bond.
Trend: The trend is the general direction (rising or falling) in which a variable is moving over the long term.
Trough: A trough is a business cycle phase in which the trend growth of real GDP is at its minimum. A trough follows a recession and precedes an expansion (or recovery). It is the opposite of a peak in the cycle.
Twin deficits: The twin deficits is the tendency for the government sector deficit and the net exports deficit to move together.

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Uncertainty

A situation in which more than one event might occur but it is not known which one.

Unemployed

An unemployed person is one who does not have a job but is available for work, willing to work, and has made some effort to find work within the previous four weeks.

Unemployment

The general condition in which resources are willing and able to produce goods and services but are not engaged in productive activities. While unemployment is most commonly thought of in terms of labor, any of the other factors of production (capital, land, and entrepreneurship) can be unemployed as well. The analysis of unemployment, especially labor unemployment, goes hand-in-hand with the study of macroeconomics that emerged from the Great Depression of the 1930s.

Unemployment insurance

A government program that partially protects workers' incomes when they become unemployed.

Unemployment rate

Unemployment rate is the percentage of the people in the labor force who are unemployed but actively seeking employment. See also unemployment.

Unintended consequences

An unintended consequence is an unexpected outcome resulting from an action (a policy development or a decison made), although it was not the intent of the action to create that outcome. When an action is undertaken, it is usually determined on the basis of the expected outcomes resulting from the action. The expected outcome would be the "intended consequence" of the action. An unintended consequence arises because the action may be designed in a manner which is contrary to the rational self-interest of those it affects. Often, due to not reflecting adequately on the self-interest of the participants in an economy, those who are empowered to make decisions improperly or inadvertantly design actions which to bring about the unintended consequence.

For example, say that it is determined that crime is a bad thing and needs to be reduced (a sentiment with which most would agree). It is further determined that there is a strong direct correlation between crime and the availability of handguns. On this basis, it is decided to pay people a $100 reward for each and every handgun turned in to the local police. The intended consequence of this action is to reduce the number of handguns and, by extension, to reduce crime locally. An unintended consequence of this action might be to increase the theft of handguns locally (increasing, rather than reducing, crime locally), or the importation of handguns (which were possibly stolen) from other markets into the local market where the policy is adopted (thereby increasing the number of handguns locally), or something else altogether which was equally unforeseen.

Why might this unintended consequence arise? It is possible that the $100 reward is adequately high to motivate some people into pursuing a new behavior which they may not have otherwise done -- to enter into the theft of handguns or the importation of handguns from elsewhere. Why would anyone do that? If the opportunity cost of the new behavior by these people is reduced by being involved with new behavior, it is fully and rationally to be expected that this new behavior is in the self-interest of those involved. Behaviors which are in one's self-interest are those which individuals will pursue. Quite simply, by pursuing the new behavior as opposed to not doing so, those involved in the new behavior are better off.

Union

A worker association that bargains with employers over wages and working conditions.

Unit elastic demand

Demand is unit elastic when the price elasticity is 1; the percentage change in the quantity demanded equals the percentage change in the price.

Unit of account

The yardstick with which people post prices and record debts.

Unlimited liability

A condition in which owners are personally held responsible for any and all debts created by a business. Proprietorships and partnerships are the two kinds of businesses in which owners have unlimited liability. The primary problem with unlimited liability is that it limits the size of a business and prevents it from taking advantage of large scale production. Contrast to limited liability.

U.S. interest rate differential

The U.S. interest rate differential is the interest rate on a U.S. dollar asset minus the interest rate on a foreign currency asset.

Utilitarianism

A principle that states that we should strive to achieve "the greatest happiness for the greatest number of people."

Utility

Utility is the benefit or satisfaction that a person receives from the consumption of a product. Generally, a product which yields utility is referred to as a good or service. Contrast with disutility.

Utility of wealth

The amount of utility that a person attaches to a given amount of wealth.

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Value: Value is the maximum amount that a person is willing to pay for a good. The value of one more unit of a good or service is its marginal benefit.
Value added: The value of a firm’s output minus the value of the intermediate goods that the firm buys from other firms.
Value of marginal product: The marginal product of an input times the price of the output.
Variable costs: Cost that do vary with the quantity of output produced.
Vault cash: Cash kept on hand in a depository institution's vault to meet day-to-day business needs, such as cashing checks for customers; can be counted as a portion of the institution's required reserves.
Velocity of circulation: The average number of times a dollar of money is used annually to buy the goods and services that make up GDP. The rate at which money changes hands.
Vertical equity: The idea that taxpayers with a greater ability to pay taxes should pay larger amounts. Contrast to horizontal equity.
Voluntary export restraint (VER): A VER is an agreement between two countries in which the government of the exporting country agrees to reduce the volume of its own exports to the other country.

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Wages: Wages are the earnings derived through the sale of the resource known as labor. Wages are included in the total costs of the firm and are a source of income for the household. The total wages earned in a nation over the course of a year are included in that nation's gross domestic product (GDP).
Wealth: The value of the existing stock of goods; those goods may be tangible or intangible. The value of all the things that people own minus any debts outstanding.
Wealth distribution: The manner in which wealth is divided among the members of the economy. A perfectly equal wealth distribution would mean everyone in the country has exactly the same wealth. In reality, wealth is unequally distributed. A few people have a great deal of wealth and most others have less. Any well-functioning economy, that's doing a pretty good job of satisfying consumer wants and needs, will have some degree of inequality in the distribution of wealth. This occurs because some people have done a good job of producing what people want, and thus grow wealthy. However, wealth tends to perpetuate itself, over and above what may be justified by valuable production. Along with wealth comes market control, political power, and the ability to accumulate more wealth at the expense of others.
Welfare economics: The study of how the allocation of resources affects economic well-being.
Wholesale Price Index: A measure of changes in the prices of goods at the wholesale level, particularly those goods sold between businesses.
Willingness to pay: The maximum amount that a buyer will pay for a good.
Working-age population: Working-age population is the total number of people aged 16 years and over who are not in jail, hospital, or some other form of institutional care.
World price: The price of a good that prevails in the world market for that good.
World Trade Organization (WTO): The WTO is an international organization that places obligations on its member countries to observe the GATT rules.

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X-axis: In a graph, this is one of two lines that intersect at a right angle at their origins. This is the "horizontal-axis" that runs from right and left. In most analyses, the variable measured on the X-axis is consider to be the independent variable.
X-inefficiency: Potential cost inefficiencies arising from a lack of effective competition within a market are known as X-inefficiencies and are often used as part of the case against monopoly.

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Y-axis: In a graph, this is one of two lines that intersect at a right angle at their origins. This is the "vertical axis" that runs up and down. In most analyses, the variable measured on the Y-axis is consider to be the dependent variable.
Yield: Also known as return. The dividends or interest paid by a security expressed as a percentage of the current price. For example, a stock with a current market value of $20 a share that is currently paying dividends at the rate of $1 a year is said to return (or have a yield of) 5 percent ($1/$20).

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Zero-coupon bond: Zero coupon bonds earn zero interest (the "coupon"). Zero coupon bonds typically are bought at a price substantially below their face value (at a "discount"). At maturity, the issuer pays the bond holder the full face value, and the difference between what is paid originally and what is paid back is the equivalent of the interest earned during the life of the bond.
Zero-coupon mortgage: A long-term commercial mortgage that defers all payments of principal and interest until maturity.

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