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Glossary
aggregate demand: - the total quantity of goods and services that consumers, businesses,
government, and those living outside the country would buy at various price levels.
aggregate expenditures: - total spending in the economy, divided into the four components: C, I,
G, and (X–IM).
aggregate supply: - the total quantity of goods and services that sellers would be willing and able
to produce at various price levels.
allocative efficiency: - the production of the combination of products that best satisfies
consumers' demands.
arbitrage: - the process of buying a commodity in one market where the price is low and
immediately selling it in a second market where the price is higher.
asset demand for money: - the desire of people to use money as a store of wealth, that is, to hold
money as an asset.
assets: - the part of a company's balance sheet that represents what it owns or what is owed to it.
automatic stabilizers: - provisions of tax laws and government spending programs that
automatically take spending out of the economy when it is booming and put spending in when it
is slowing down.
autonomous spending (expenditures): - the portion of total spending that is independent of the
level of income.
balance of payments: - an accounting of a country's international transactions that involves the
payment and receipts of foreign currencies.
balance of trade: - the value of a country's export of goods and services less the value of its
imports.
balanced budget: - net tax revenues equal government spending on goods and services.
balanced-budget fiscal policy: - the belief that a government's budget should be balanced each
budget period.
bank rate: - the rate of interest that the Bank of Canada charges a commercial bank for a loan.
budget deficit: - government spending on goods and services in excess of net tax revenues.
budget surplus: - net tax revenue in excess of government spending on goods and services.
business cycle: - the expansionary and contractionary phases in the growth rate of real GDP.
capital account: - a subcategory of the balance of payments that reflects changes in ownership of
assets associated with foreign investment.
capital: - the human-made resource that is used to produce other products.
ceteris paribus: - other things being equal, or other things remaining the same.
change in demand: - a change in the quantities demanded at every price, caused by a change in
the determinants of demand.
change in supply: - a change in the quantities supplied at every price, caused by a change in the
determinants of supply.
change in the quantity demanded: - the change in quantity that results from a price change. It is
illustrated by a movement along a demand curve.
change in the quantity supplied: - the change in the amounts that will be produced as a result of a
price change. This is shown as a movement along a supply curve.
commodity money: - a type of money that can also usefully function as a commodity.
comparative advantage: - the advantage that comes from producing something at a lower
opportunity cost than others are able to do.
complementary products: - products that tend to be purchased jointly and for which demand is
therefore related.
consumer goods and services: - products that are used by consumers to satisfy their wants and
needs.
consumer price index: - a measurement of the average level of prices of the goods and services
that a typical Canadian family consumes.
consumption function: - the relationship between income and consumption.
consumption: - the expenditure by households on goods and services.
contractionary monetary policy: - a policy in which the amount of money in the economy is
decreased and credit becomes harder and more expensive to obtain.
cost–push inflation - inflation caused by an increase in the costs of production or in profit levels,
affecting the supply side.
countercyclical fiscal policy: - deliberate adjustments in the level of government spending and
taxation in order to close recessionary or inflationary gaps.
crowding-out effect: - the idea that government borrowing to finance a deficit crowds out private
investment because it causes interest rates to rise.
currency appreciation: - a rise in the exchange rate of one currency for another.
currency depreciation: - the fall in the exchange rate of one currency for another.
currency-exchange controls: - government-imposed restrictions limiting the amount of foreign
currencies that can be obtained.
current account: - a subcategory of the balance of payments that shows the income or
expenditures related to exports and imports.
cyclical unemployment: - occurs as a result of the recessionary phase of the business cycle.
cyclically balanced budget fiscal policy: - the use of countercyclical fiscal policy to balance the
budget over the life of the business cycle.
deflation: - a decrease in the overall price level.
demand deposit: - money deposited in a chequing account, which is available on demand.
demand schedule: - a table showing the various quantities demanded per period of time at
different prices.
demand: - the quantities that consumers are willing and able to buy per period of time at various
prices.
demand–pull inflation - inflation that occurs when total demand for goods and services exceeds
the economy's capacity to produce those goods.
derivative: - a financial instrument whose value is derived from some other fixed-return asset.
devaluation: - the refixing by government of an exchange rate at a lower level.
direct investment: - the purchase of real assets or of more than 50% of a company's equity.
dirty float: - an exchange rate that is not officially fixed by government but is managed by the
central bank's ongoing intervention in the market.
discouraged worker: - an individual who wants work but is no longer actively seeking it because
of the belief that no opportunities exist.
disposable income: - the personal after-tax income of households.
dis-saving: - spending on consumption in excess of income.
economic growth: - an increase in an economy's real GDP per capita or an increase in the
economy's capacity to produce.
employed: - those who are in the labour force and hold paid employment.
enterprise: - the human resource that innovates and takes risks.
equation of exchange: - a formula that states that the quantity of money times the velocity of
money is equal to nominal GDP (price times real GDP).
equilibrium price: - the price at which the quantity demanded equals the quantity supplied such
that there is neither a surplus nor a shortage.
equilibrium quantity: - the quantity that prevails at the equilibrium price.
equilibrium: - a state of balance of equal forces.
excess reserves: - reserves in excess of what the bank wants to hold as its target reserves.
exchange rate: - the rate at which one currency is exchanged for another.
expansionary monetary policy: - a policy that aims to increase the amount of money in the
economy and make credit cheaper and more easily available.
expenditure equilibrium: - the income at which the value of production and aggregate
expenditures are equal.
exports: - goods and services that are sold to other countries and create an injection into the
circular flow of income.
factor market: - the market for the factors of production.
factors of production: - physical or virtual entities that can be used to produce goods and
services.
fiat money: - anything that is declared as money by government order.
financial intermediaries: - financial institutions, such as banks, that act as agents between
borrowers and lenders.
fiscal policy: - government's approach toward its own spending and taxation.
fixed exchange rate: - a currency exchange rate pegged by government and therefore prevented
from rising or falling.
flexible exchange rate: - a currency exchange rate determined by the market forces of supply and
demand and not interfered with by government action.
foreign factor income: - income (such as wages, interest, or dividends) that nationals receive
from providing their services to another country.
foreign-trade effect: - the effect that a change in prices has upon exports and imports.
fractional reserve system: - a banking system whereby banks keep only a small fraction of their
total deposits on reserve in the form of cash.
frictional unemployment: - that part of total unemployment caused by the fact that it takes time
for people to find their first job or to move between jobs.
full employment: - frictional and structural unemployment exist, but cyclical unemployment is
zero.
GDP deflator: - a measure of the price level of goods included in the GDP, calculated by
dividing the nominal GDP by the real GDP and multiplying by 100.
GDP gap: - the difference between potential GDP and actual GDP (real or nominal).
government spending: - purchases of goods and services by government.
gross domestic product (GDP): - the value of all final goods and services produced in an
economy in a certain period.
gross investment: - the total value of all new capital goods, both replacement and additional
capital.
gross national product (GNP): - the total market value of all final goods and services produced
by the citizens of a country, regardless of the location of production.
hedge fund: - an unregulated investment fund that is open only to a limited range of investors
who pay a performance fee to the fund's managers.
human capital: - the accumulated skills and knowledge of human beings.
imports: - goods and services that are bought from other countries and constitute a leakage from
the circular flow of income.
income effect: - the effect that a price change has on real income and therefore on the quantity
demanded of a product.
income: - the earnings of factors of production expressed as an amount per period of time.
induced spending: - the portion of spending that depends on the level of income.
inferior products: - products for which demands will decrease as a result of an increase in income
and will increase as a result of a decrease in income.
inflation: - a persistent rise in the general level of prices.
inflationary gap: - the difference between actual real GDP and potential real GDP when the
economy is temporarily producing an output above full employment.
injection: - any spending flow that is not dependent on the current level of income.
inputs: - physical or virtual entities that can be used to produce goods or services.
interest rate: - the annual rate at which payment is made for the use of money (or borrowed
funds); a percentage of the borrowed amount.
interest: - the payment made and the income received for the use of capital.
interest-rate effect: - the effect that a change in prices, and therefore interest rates, has upon
investment; for example, higher prices cause higher interest rates, which leads to lower
investment.
investment bank: - a financial institution that assists corporations and governments in raising
money by acting as their agent in selling new bonds to the public.
investment: - spending on new capital goods.
labour force: - members of the working-age population, both employed or unemployed.
labour productivity: - a measure of the output produced per unit of labour input in a specific
period.
labour: - human physical and mental effort that can be used to produce goods and services.
Laffer curve: - the graphical representation of the idea that in terms of tax revenue there is an
optimal tax rate; above or below this rate, tax revenue would be lower.
land: - any natural resource that can be used to produce goods and services.
law of increasing costs: - as an economy's production level of any particular item increases, its
per-unit cost of production rises.
leakage: - income received within the circular flow that does not flow directly back.
liabilities: - the part of a company's balance sheet that represents what it owes.
M1: - currency in circulation plus demand deposits.
M2: - M1 plus all notice and personal term deposits.
M3: - M2 plus nonpersonal term deposits known as certificates of deposit.
macroeconomic equilibrium: - a situation in which aggregate demand equals aggregate supply.
macroeconomics: - the study of how the major components of an economy interact; it includes
the topics of unemployment, inflation, interest rate policy, and the spending and taxation policies
of government.
marginal leakage rate: - the ratio of change in leakages that results from a change in income.
marginal propensity to consume: - the ratio of the change in consumption corresponding to the
change in income.
marginal propensity to expend: - the ratio of the change in expenditures that results from a
change in income.
marginal propensity to import: - the ratio of the change in imports that results from a change in
national income.
marginal propensity to save: - the ratio of the change in savings corresponding to the change in
income.
marginal tax rate: - the ratio of the change in taxation that results from a change in income.
market demand: - the total demand for a product by all consumers.
market supply: - the total supply of a product offered by all producers.
market: - a mechanism that brings buyers and sellers together and assists them in negotiating the
exchange of products.
medium of exchange: - something that is accepted as payment for goods and services.
microeconomics: - the study of the outcomes of decisions by people and firms; it focuses on the
supply and demand of goods, the costs of production, and market structures.
monetarism: - an economic school of thought that believes that cyclical fluctuations of GDP and
inflation are usually caused by changes in money supply.
monetary policy: - policy designed to change the money supply, credit availability, and interest
rates.
monetizing the debt: - when government borrows from its central bank to finance increased
spending.
money multiplier: - the increase in total deposits that would occur in the whole banking system
as a result of a new deposit in a single bank.
money: - any medium of exchange that is widely accepted.
multiplier: - the effect on income of a change in autonomous spending, such as I, G, X, or
autonomous C.
national debt: - the sum of the federal government's budget deficits less surpluses.
national income (Y): - total earnings of all the factors of production in a certain period.
national income equilibrium: - that level of income where total leakages from the circular flow
equal total injections.
natural rate of unemployment: - the unemployment rate at full employment.
near-banks: - financial institutions, such as credit unions or trust companies, that share many of
the functions of commercial banks but are not defined as banks under the Bank Act (they are also
known as nonbank financial intermediaries).
net domestic income: - incomes earned in Canada (equals the sum of wages, profits, interest,
farm, and self-employed income).
net exports: - total exports minus total imports of goods and services which can be written as (X–
IM) or as XN.
net investment: - the addition to the capital stock during a year (equals gross investment less
depreciation).
net national product (NNP): - gross national product less capital consumption (or depreciation).
net tax revenue: - total tax revenues minus government transfer payments; total tax revenue
received by government less transfer payments.
net worth: - the total assets less total liabilities of a company (also called equity).
nominal GDP: - the value of GDP in terms of prices prevailing at the time of measurement.
nominal income: - the present dollar value of a person's income.
nominal wage: - the present day value of a current wage.
normal products: - products for which demand will increase as a result of an increase in income
and will decrease as a result of a decrease in income.
normative statement: - a statement of opinion or belief that cannot be verified.
notice deposit: - money deposited in a savings account which is available only after notice is
given.
official settlements account: - a subcategory of the balance of payments that shows the change in
a country's official foreign exchange reserves.
Okun's law: - the observation that for every 1 percent of cyclical unemployment, an economy's
GDP would be 2.5 percent below its potential.
open-market operations: - the buying and selling of securities by the Bank of Canada on the open
(to the public) market.
opportunity cost: - the value of the next-best alternative that is given up as a result of making a
particular choice.
output costs: - (of inflation) costs of loss of output resulting from inflation.
overnight interest rate: - the interest rate that commercial banks charge one another on overnight
loans.
participation rate: - the percentage of those in the working-age population who are actually in the
labour force.
personal income: - income paid to individuals before the deduction of personal income taxes.
Phillips curve: - a curve that illustrates the inverse relationship between unemployment and
inflation rates.
portfolio investment: - the purchase of shares or bonds representing less than 50 percent
ownership.
positive statement: - a statement of fact that can be verified.
potential GDP: - the total amount that an economy is capable of producing when all of its
resources are being fully utilized.
procyclical: - action by government that tends to push the economy in the same direction that it
is leaning in.
product market: - the market for consumer goods and services.
production possibilities curve: - a graphical representation of the various combinations of
maximum output that can be produced from the available resources and technology.
productive efficiency: - the production of an output at the lowest possible average cost.
profit: - the income received from the activity of enterprise.
protectionism: - the economic policy of protecting domestic producers by restricting the
importation of foreign products.
purchasing power parity theory: - a theory suggesting that exchange rates will change so as to
equate the purchasing power of each country's currency.
quota: - a limit imposed on the production or sale of a product.
real GDP: - the value of GDP measured in terms of prices prevailing in a given base year.
real income: - the purchasing power of income; that is, nominal income divided by the price
level.
real interest rate: - the rate of interest measured in constant dollars.
real wage: - the amount of goods and services that an employee can buy for a given amount of
nominal wage.
real-balances effect: - the effect that a change in the value of real balances has on consumption
spending.
recession: - a period when the economy is producing below its potential and has had two
consecutive quarters of negative growth.
recessionary gap: - the difference between actual real GDP and potential real GDP when the
economy is producing below its potential.
redistributive cost: - (of inflation) costs that are shifted from one group in society to another
group by inflation.
rent: - the payment made and the income received for the use of land.
resources (or factors of production or inputs): - physical or virtual entities that can be used to
produce goods and services.
saving function: - the relationship between income and saving.
saving: - the portion of income that is not spent on consumption.
Say's Law: - the proposition that “supply creates its own demand”; that is, production (supply)
creates sufficient income and thus spending (demand) to purchase the production (attributed to
French economist Jean-Baptiste Say.)
shortage: - at the prevailing price, the quantity supplied is smaller than the quantity demanded.
spread: - the difference between the rate of interest a bank charges borrowers and the rate it pays
savers.
stagflation: - the simultaneous occurrence of high inflation and unemployment.
store of wealth: - the function of money that allows people to hold and accumulate wealth.
structural unemployment: - the part of total unemployment that results from a mismatch in the
skills or location between jobs available and people looking for work.
sub-prime mortgage: - a mortgage made to a borrower with a low credit rating that carries a
higher interest rate than that charged to a conventional borrower.
subsidy: - a payment by government for the purpose of increasing some particular activity or
increasing the output of a particular good.
substitute products: - any products for which demand varies directly in relation to a change in the
price of a similar product.
substitution effect: - the substitution of one product for another as a result of a change in their
relative prices.
supply schedule: - a table showing the various quantities supplied per period of time at different
prices.
supply: - the quantities that producers are willing and able to sell per period of time at various
prices.
surplus: - at the prevailing price, the quantity demanded is smaller than the quantity supplied.
target for the overnight rate: - the Bank of Canada's key policy interest rate; it is the midpoint of
the Bank's 50-basis-point operating band.
target reserve ratio: - the portion of deposits that a bank wants to hold in cash.
tariff: - a tax (or duty) levied on imports.
technology: - a method of production; the way in which resources are combined to produce
goods and services.
terms of trade: - the average price of a country's exports compared with the price of its imports.
transactions demand for money: - the desire of people to hold money as a medium of exchange,
that is, to effect transactions.
transfer payments: - one-way transactions in which payment is made by the government, but no
good or service flows back in return.
transmission process: - the Keynesian view of how changes in money affect (transmit to) the real
variables in the economy.
unemployed: - those who are in the labour force and are actively seeking employment, but do not
hold paid employment.
unemployment rate: - the percentage of those in the labour force who do not hold paid
employment.
unemployment: - the number of persons 15 years old and over who are actively seeking work but
are not employed.
unit of account: - the function of money that allows us to determine easily the relative value of
goods.
unplanned investment: - the amount of unintended investment by firms in the form of a buildup
or rundown of inventories, that is, the difference between production (Y) and aggregate
expenditure (AE).
value of production: - the total receipts of all producers.
velocity of money (or circulation): - the number of times per year that the average unit of
currency is spent (or turns over) buying final goods or services.
voluntary export restriction (VER): - an agreement by an exporting country to restrict the amount
of its exports to another country.
wages: - the payment made and the income received for the use of labour.
wealth effect: - the direct effect of a change in wealth on consumption spending.
working-age population: - in Canada, the total population, excluding those under 15 years of age,
those in the armed forces, and residents of aboriginal reserves or the territories.