Download AD VALOREM TAX:

AD VALOREM TAX:

A tax that is specified as a percentage
of value. Sales, income, and property
taxes are three of the more popular ad
valorem taxes devised by government.
The total ad valorem tax paid increases
with the value of what's being taxed.
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.
AVERAGE TAX RATE:

A tax rate that is the percentage of the
total tax base paid in taxes. Comparable
to any average, this is the total taxes
collected or paid divided by the total
value of the tax base. For example, if a
person earns $50,000 in income and
pays $5,000 in taxes, then the average
income tax rate is 10 percent. The
contrasting term is marginal tax rate.
CONSUMPTION:

The use of resources, goods, or services to
satisfy wants and needs. At the
microeconomic level, consumption is primarily
analyzed in the context of utility, demand and
their importance to market exchanges. At the
macroeconomic level, consumption is most
important as expenditures by the household
sector on gross domestic product, one of four
aggregate expenditures (the other three
being investment, government purchases,
and net exports).
POLLUTION:

Any waste that imposes an opportunity cost when it's returned
to the natural environment. Pollution is one of the more
prevalent examples of an externality cost and market failure.
Examples include, but by no means are limited to, car exhaust,
municipal sewage, industrial waste, and agricultural chemical
runoff from farms. Pollution waste can be classified as
degradable, persistent, or nondegradable, depending on how
easily it can be broken down into nonharmful form by the
natural environment. Pollution problems can never be
eliminated, but they can be handled with efficiency if the
amount of pollution is such that the cost of damages is the
same as the cost of cleanup.
COASE THEOREM:

A policy proposition, developed by Ronald Coase, that pollution
and other externalities can be efficiently controlled through
voluntary negotiations among the affected parties (polluters and
those harmed by pollution). A key to the Coase theorem is that
many pollution problems involve common-property goods that
have no clear-cut ownership or property rights. With clear-cut
property rights, "owners" would have the incentive to achieve
an efficient level of pollution. This theorem states that it doesn't
matter who receives the property rights, so long as someone
does. Pollution can be reduced through voluntary negotiation by
assigning private property rights to common-property resources.
If common-property resources are privately owned, a market in
property rights can be established. Owners then have the
incentive to protect the quality of their resources.
EXTERNALITIES:

Costs or benefits that are not included in the
market price of a good because they are not
included in the supply price or the demand
price. Pollution is an example of an
externality cost if producers aren't the ones
who suffer from pollution damages. Education
is an example of an externality benefit when
members of society other than students
benefit from a more educated population.
Externality is one type of market failure that
causes inefficiency.
PIGOUVIAN TAX:

A tax on an external cost, such as pollution,
designed to use market forces to achieve an
efficient allocation of resources. A. C. Pigou,
one of the first economists to study the
market failure of externalities, is credited with
developing this tax system for internalizing
costs external to the market. An external cost
caused by pollution, for example, can be
internalized if polluters pay a tax equal to the
value of the external cost.
MARKET FAILURE:

A condition in which a market does not
efficiently allocate resources to achieve the
greatest possible consumer satisfaction. The
four main market failures are--(1) public
good, (2) market control, (3) externality, and
(4) imperfect information. In each case, a
market acting without any government
imposed direction, does not direct an efficient
amount of our resources into the production,
distribution, or consumption of the good.
EFFICIENCY:

Obtaining the most possible satisfaction from
a given amount of resources. Efficiency for
our economy is achieved when we can not
increase our satisfaction of wants and needs
by producing more of one good and less of
another. This is one of the five economic
goals, specifically one of the two micro goals
(the other being equity).
POLLUTION RIGHTS MARKET:

A market-based system for the exchange of permits
or "rights" to release pollution residuals into the
environment. These pollution permits would be
bought and sold in an organized market not unlike
the stock market. Prices would vary according to the
forces of supply and demand, allowing individual
participants to buy and sell based on their particular
circumstances. The total number of permits would be
based on the amount of permissible pollution
residuals that can be safely released into the
environment during a given period of time. These
permits could be given away or auction off to
potential polluters.
RECYCLING:

The use or reuse of previously extracted materials,
waste products, or finished goods as inputs in the
production process rather than using newly extracted
natural resources. Recycling is one method of
controlling pollution. Many types of resources are
commonly recycled. For consumers, aluminum and
newspapers are commonly recycled products.
Producers frequently recycle steel and iron. In these
cases, recycled materials augment the market supply.
They also prevent the return of residuals to the
environment.
ENVIRONMENT:

All of the naturally occurring stuff that
came with the planet, before it's been
altered, extracted, transformed, or used
up for production. It includes the air,
water, land, vegetation, and wildlife.
INVISIBLE HAND:

The notion that buyers and sellers, consumers and
producers, households and businesses, pursuing their
own self-interests, do what's best for the economy-automatically, without any government intervention,
as if guided by an invisible hand. This invisible hand
was essential to the economic analysis of markets in
Adam Smith's The Wealth of Nations. It has
continued to be cornerstone in conservative
economic policies that call for limits on government
intervention in the economy.
COMPETITION:

In general, the actions of two or more rivals in
pursuit of the same objective. In the context of
markets, the specific objective is either selling goods
to buyers or alternatively buying goods from sellers.
Competition tends to come in two varieties -competition among the few, which is market with a
small number of sellers (or buyers), such that each
seller (or buyer) has some degree of market control,
and competition among the many, which is a market
with so many buyers and sellers that none is able to
influence the market price or quantity exchanged.
TAXES:

Any sort of forced or coerced payments 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.
PUBLIC GOOD:

A good that's difficult to keep nonpayers from consuming
(excludability), and use of the good by one person doesn't
prevent use by others (rival consumption). Examples include
national defense, a clean environment, and any fourth of July
fireworks display. Public goods are invariably provided by
government because there's no way a private business can
profitably produce them. Private businesses can't sell public
goods in markets, because they can't charge a price and keep
nonpaying people away. Moreover, businesses shouldn't charge
a price, because there's no opportunity cost for extra
consumers. For efficiency, government needs to pay for public
goods through taxes.
FREE-RIDER PROBLEM:

The inclination to enjoy the benefit of a good without
paying for it--if you don't have to. This is the main
reason public goods are produced by government.
Most people won't voluntarily pay for a public good,
because excludability means they can get it without
paying--a free ride. With a large number of free
riders--perhaps everyone--voluntary payments like
those occurring in markets won't provide enough
revenue to pay production costs. The only way to
finance public goods is to force free-riders, and
everyone else, to pay through taxes.
GOOD TYPES:

We can identify four different types of goods
based on two key characteristics -- rival
consumption and excludability. Private that
are rival in consumption and easily subject to
the exclusion of nonpayers. Public goods that
are nonrival in consumption and the exclusion
of nonpayers is virtually impossible. Nearpublic goods that are nonrival in consumption
and easily subject to the exclusion. Commonproperty goods that are rival in consumption
and not easily subject to the exclusion.
REGULATION:

Government rules or laws that control the activities of
businesses and consumers. The motivation for
regulation is that businesses are inclined to do things
that are harmful to the public--actions which need to
be prevented or otherwise controlled. Regulation is
essentially an extension of government's authority to
protect one member of society from another. It tends
to take one of two forms--(1) industry regulation
that's intended to prevent firms from gaining and
abusing excessive market control and (2) social
regulation that seeks to protect consumers for
problems caused by pollution, unsafe products, and
the lack of information (market failure).
GOVERNMENT FUNCTIONS:

Activities that are more efficiently performed by
government than by private sector households and
business. In fact, historical evidence (that is, 10,000
years of civilization--more or less) strongly indicates
that we, regularly human-being-type people, are
willing to put of with the coercive shenanigans of
government (taxes, laws, regulations, abuse of
power, oppression of the masses, meaningless wars)
only because government does perform useful
functions. Fire is the best analogy for government.
When raging out of control both fire and government
can cause horrific devastation. But when controlled,
both can provide unparalleled good.
ECONOMIC POLICIES:

Government actions designed to affect
economic activity and pursue one or
more economic goals. Also called
economic policies. The four common
types of government policies are: fiscal,
monetary, regulatory, and judicial.
FISCAL POLICY:

Use of the federal government's powers of
spending and taxation to stabilize the
business cycle. If the economy is mired in a
recession, then the appropriate fiscal policy is
to increase spending or reduce taxes--termed
expansionary policy. During periods of high
inflation, the opposite actions are needed-contractionary policy. The consequences of
fiscal policy are typically observed in terms of
the federal deficit.
AUTOMATIC STABILIZER:

A feature of the federal government's budget that tends to
reduce the ups and downs of the business cycle without the
need for any special legislative action, that is stabilization
policies. The two key automatic stabilizers are income taxes and
transfer payments. When our economy drops into a recession,
unemployment rises, aggregate output declines, and people
have less income. But with less income, they pay fewer income
taxes, and thus there's less of a drain on consumption than their
might have been. Likewise, many who are unemployed get
transfer payments in the form of unemployment compensation,
welfare, or Social Security. This lets them consume more than
they would have otherwise. During an expansion, both of these
go in the other direction. As a result, a recession sees more
spending and fewer taxes, while an expansion has less spending
and more taxes, all occurring quite automatically.
WELFARE:

An assortment of programs that provide assistance to the poor.
The cornerstone of our welfare system is Aid to Families with
Dependent Children (AFDC), which was created by the Social
Security Act (1935). It provides cash benefits to assist needy
families with children under the age of 18. Funding comes partly
from the federal government and partly from states. Because
states also administer their own programs, benefits and
qualification criteria differ from state to state. A second part of
the welfare system, one that's run entirely by the federal
government, is Supplemental Security Income (SSI). This
program provides cash benefits to elderly, blind, and disabled in
addition to any benefits received through the Social Security
system. Our welfare system includes a whole bunch of
additional benefits, including Medicaid, food stamps, low-cost
housing, school lunches, job training, day care, and earnedincome tax credits.
SOCIAL SECURITY:

A system for providing financial assistance to the poor, elderly, and disabled. The
social security system in the United States was established by the Social Security
Act (1935) in response to the devastating problems of the Great Depression.
Our current Social Security system has several parts. The first part, Old Age and
Survivors Insurance (OASI) is the one the usually comes to mind when the
phrase "Social Security" comes up. It provides benefits to anyone who has
reached a certain age and who has paid taxes into the program while employed.
It also provides benefits to qualified recipients survivors or dependents. The
second part of the system is Disability Insurance (DI), which provides benefits
to workers and their dependents in the case of physical disabilities that keeps
them from working. The third part is Hospital Insurance (HI), more commonly
termed medicare. Medicare provides two types of benefits, hospital coverage for
anyone in the OASI part of the system and optional supplemental medical
benefits that require a monthly insurance premium. The last part of the social
security system is Public Assistance (PA), which is the official term for welfare
and is covered under it's own heading.
INCOME EARNED BUT NOT
RECEIVED:

Abbreviate IEBNR, this is the income earned by
factors of production, but not received by members
of the household sector. The three types of income
earned but not received by the factors of production
are Social Security taxes, corporate profits taxes, and
undistributed corporate profits. In each case a factor
of production has rightfully "earned" the income by
contributing to valuable production contained in gross
domestic product. However, because this income is
not paid to the factor and it is not income received by
the household sector. IEBNR is subtracted from
national income to calculate personal income.
BABY BOOMER:

A citizen of the good old U. S. of A. born between the years
1946 and 1960. These Boomers represent a relatively large
segment of the population and outnumber any other group born
during a similar period, such as those born from 1931 to 1945
or from 1961 to 1975. Over the years, they've tended to set the
standard for consumption, production, and politics. They have
had and will continue to have a big impact on the Social
Security system. As labor, they've provided an amble pool of tax
funds and thus sizable benefits to Social Security recipients
during the 1980s and 1990s. When these Boomers retire in the
2020s and beyond, however, they will leave a big gap in the
labor force and also demand a great deal from the Social
Security system.
LABOR:

One of the four basic categories of resources,
or factors of production (the other three are
capital, land, and entrepreneurship). Labor is
the services and efforts of humans that are
used for production. While labor is commonly
thought of as those who work in factories, it
includes all human efforts (except
entrepreneurship), such as those provided by
clerical workers, technicians, professionals,
managers, and even company presidents.
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.
FACTORS OF PRODUCTION:

The four basic factors used to produce goods
and services in the economy--labor, capital,
land, and entrepreneurship. These are also
called resources or scarce resources. The
term "factors of production" is quite
descriptive of the function these "resources"
perform. Labor, capital, land, and
entrepreneurship are the four "factors" or
items use in the "production" of goods and
services. So there you have it "factors" of
"production."
BUDGET CONSTRAINT:

The alternative combinations of two different goods that can be
purchased with a given income and given prices of the two
goods. This budget constraint, also termed budget line, plays a
major role in the analysis of consumer demand using
indifference curve analysis. Indifference curves represents the
"willingness" aspect of consumer demand, the budget constraint
captures the "ability". One key consumer demand topic is to
analyze how consumer equilibrium is affected by changes in the
price of one good. Then end result of this analysis is a demand
curve. For more fascinating uses of the budget constraint and
indifference curves, and consumer demand analysis, see
income-consumption curve and price-consumption curve.
DEMAND CURVE:

A graphical representation of the
relationship between the demand price
and quantity demanded (that is, the law
of demand), holding all ceteris paribus
demand determinants constant.
BENEFIT PRINCIPLE:

A principle of taxation in which taxes are based on the benefits
received by people using the good financed with the tax. The
benefit principle is often difficult to implement because by their
very nature, many government produced goods (public goods)
do not have easily measured benefits. But in those cases where
benefits are identifiable, government is not shy about
establishing taxes, fees, or charges in accordance with the
benefit principle. Public college tuition, national park admission
fees, and gasoline excise taxes are three common examples.
The beneficiaries of education, a wilderness experience, and
highway use are asked (required) to pay accordingly.
ABILITY-TO-PAY PRINCIPLE:

A principle of taxation in which taxes are based on
the income or resource-ownership ability of people to
pay the tax. The income tax collected by our friends
at the Internal Revenue Service is one of the most
common taxes that seeks to abide by the ability-topay principle. In theory, the income tax system is set
up such that people with greater incomes pay more
taxes. Proportional and progressive taxes follow this
ability-to-pay principle, while regressive taxes, such
as sales taxes and Social Security taxes, don't.
REGRESSIVE TAX:

A tax in which people with more income pay
a smaller percentage in taxes. A regressive
tax is given by this example--You earn
$10,000 a year and your boss gets $20,000.
You pay $2,000 in taxes (20 percent) while
your boss also pays $2,000 in taxes (10
percent). Examples of regressive taxes
abound (is this surprising given the political
clout of the wealthy?), including sales tax,
excise tax, and Social Security tax.
PROGRESSIVE TAX:

A tax in which people with more income pay
a larger percentage in taxes. A progressive
tax is given by this example -- You earn
$10,000 a year and your boss gets $20,000.
You pay $1,000 in taxes (10 percent) and
your boss pays $4,000 in taxes (20 percent).
Our income tax system is designed to be
progressive, but assorted loopholes and
deductions keep it from being as progressive
in practice as it is on paper.
PROPORTIONAL TAX:

A tax in which people pay the same percentage of
income in taxes regardless of their incomes. Here's
an example of a proportional tax -- You earn $10,000
a year and your boss gets $20,000. You pay $1,000
in taxes (10 percent) and your boss pays $2,000 in
taxes (10 percent). While a proportional tax would
seem to make a lot of sense, very few taxes are
designed to be proportional and even fewer come out
that way in practice. The reason is often attributable
to the ongoing battle between the second and third
estates. Each side wants the other to pay a larger
share of taxes.
PER UNIT TAX:

A tax that is specified as a fixed amount
for each unit of a good sold. Federal
excise taxes on gasoline and cigarettes
fall into this per unit tax category.
BANKRUPTCY:

A legal declaration that the liabilities of a
proprietor (individual), partnership, or
corporation are greater than assets. In other
words, a consumer or business that is unable
to pay the bills can go to court and be
formally declared bankrupt. The impetus for
entering a court can come voluntarily from
the deadbeat who has acquired more
liabilities than assets, or involuntarily from the
creditors who have been unable to collect
from the deadbeat.
BUDGET DEFICIT:

An excess of budgetary expenditures over revenues.
The federal government is well known for its
inclination to operate with a budget deficit. But it is
not alone. Consumers also find themselves in this
position on many occasions. When a budget deficit
occurs, the excess spending is financed through
borrowing. For the federal government this involves
issuing government securities. For households it
typically involves some sort of bank loan, credit card
purchase, use of savings (borrowing from thyself), or
hitting a friend up for a few bucks.
UNDERGROUND ECONOMY:

Illegal and unreported market transactions and
productive activity that escape the watchful eyes of
official record keepers. By most estimates, a
substantial amount of productive activity takes place
in the underground economy for the United States.
Of course, these are only estimates because such
activity, by definition, goes unreported. Were activity
in the underground economy added to official activity
in the "overground" economy, then gross domestic
product could be boosted by as much as 25% to
50%, or more.
GROSS DOMESTIC PRODUCT:

The total market value of all goods and
services produced within the political
boundaries of an economy during a given
period of time, usually one year. This is the
government's official measure of how much
output our economy produces. It's tabulated
and reported by the National Income and
Product Accounts maintained by the Bureau
of Economic Analysis, which is part of the U.
S. Department of Commerce.
REAL GDP:

The total market value, measured in constant prices,
of all goods and services produced within the political
boundaries of an economy during a given period of
time, usually one year. The key is that real gross
domestic product is measured in constant prices, the
prices for a specific base year. Real gross domestic
product, also termed constant gross domestic
product, adjusts gross domestic product for inflation.
You might want to compare real gross domestic
product with the related term nominal GDP.
REAL INTEREST RATE:

The market, or nominal interest rate, after adjusting
for inflation. This is the interest rate lenders receive
and borrowers pay expressed in real dollars. There
two ways to think about the real interest rate, (1) the
historical, after-the-fact, interest rate and (2) the
desired interest rate lenders and borrowers have in
mind when entering into a loan. The first one tells us
the purchasing power of any interest payments
received or paid. The second way of looking at the
real interest rate is based on expectations of the
future.
PURCHASING POWER:

In general the quantities of goods and services that can be
bought with a given amount of money. The notable feature of
purchasing power is that it declines as prices rise. In particular,
inflation is the number one nemesis of purchasing power. When
inflation gives higher prices, purchasing power falls. Be careful,
though, that you don't get too caught up in the purchasing
power of just a single dollar. The real question is not how much
stuff one dollar can buy, but how many dollars you have. In
other words, while the price of a brand new car might have
been $10 when you were a kid (in the good old days), the
average annual income was also $20. That's the same
purchasing power as a $10,000 car price and a $20,000 income.
LIVING STANDARD:

In principle, an economy's ability to
produce the goods and services that
consumers use to satisfy their wants
and needs. In practice, it is the average
real gross domestic product per person-usually given the name per capita real
GDP.
ECONOMIC GROWTH:

The long-run expansion of the economy's
ability to produce output. This is one of five
economic goals, specifically one of the three
macro goals (stability and full employment
are the other two). Economic growth is made
possible by increasing the quantity or quality
of the economy's resources (labor, capital,
land, and entrepreneurship).
ECONOMIC DEVELOPMENT:

The process of improving the economy's ability to
satisfy consumers wants and needs. Unlike economic
growth, which is concerned with year to year
increases in production, economic development deals
more with the basic fabric of society, especially the
institutions that govern the way our economy and
society functions. As such, a lesser developed nation
is not only likely to have a low levels of production
and limited amount capital, but also cultural beliefs
and government practices that prevent more effective
use of the capital.
TWO-SECTOR KEYNESIAN
MODEL:

model used to identify equilibrium in
Keynesian economics based on aggregate
expenditures by the two basic sectors
(household and business). Equilibrium is
achieved at the intersection of the aggregate
expenditures line, AE = C + I, and the 45degree line, Y = AE. This is the most basic
Keynesian aggregate expenditures model that
captures an induce expenditure
(consumption) and an autonomous
expenditure (investment).
KEYNESIAN ECONOMICS:

A school of thought developed by John Maynard Keynes built on
the proposition that aggregate demand is the primary source of
business cycle instability, especially recessions. The basic
structure of Keynesian economics was initially presented in
Keynes' book The General Theory of Employment,
Interest, and Money, published in 1936. For the next forty
years, the Keynesian school dominated the economics discipline
and reached a pinnacle as a guide for federal government policy
in the 1960s. It fell out of favor in the 1970s and 1980s, as
monetarism, neoclassical economics, supply-side economics,
and rational expectations became more widely accepted, but it
still has a strong following in the academic and policy-making
arenas.
GREAT DEPRESSION:

A period of time from 1929 to 1941 in
which the economy experienced high
rates of unemployment (averaging well
over 10%), low production, and limited
investment. This period of stagnation
prompted radical changes in the way
government viewed it's role in the
economy and lead to our modern study
of macroeconomics.
BUSINESS CYCLE:

The recurring expansions and contractions of the
national economy (usually measured by real gross
domestic product). A complete cycle typically lasts
from three to five years, but could last ten years or
more. It is divided into four phases -- expansion,
peak, contraction, and trough. Unemployment
inevitably rises during contractions and inflation
tends to worsen during expansions. To avoid the
inflation and unemployment problems of business
cycles, the federal government frequently undertakes
various fiscal and monetary policies.
STAGFLATION:

High inflation rates at the same time the economy
has high unemployment rates. Throughout much of
the economic history of the good old U. S. of A.,
we've seen a tradeoff between inflation and
unemployment. During an expansion, inflation is
usually higher and unemployment is lower. The
opposite has tended to occur during a recession. In
the 1970s, however, inflation worsened at the same
time the economy dropped into a recession. This led
economists not only to coin the term stagflation
(stagnation + inflation), but also to reevaluate the
existing explanation of how the economy works.
MISERY INDEX:

The sum of the unemployment rate and
the inflation rate. For example, a 5
percent unemployment rate and a 3
percent inflation rate gives us a misery
index of 8. This index was developed
during the 1970s when inflation and
unemployment were both moving in the
upward direction.
MARGINAL PROPENSITY FOR
GOVERNMENT PURCHASES:

The proportion of each additional dollar of
national income that is used for government
purchases. Or alternatively, this is the change
in government purchases due to a change in
national income. Abbreviated MPG, the
marginal propensity for government
purchases is the slope of the government
purchases line used in the analysis of
Keynesian economics. As such, it also plays a
role in the slope of the aggregate expenditure
line and the multiplier effect.
MULTIPLIER:

The cumulatively reinforcing interaction between consumption
and production that amplifies changes in investment,
government spending, or exports. In other words, if businesses
decide to increase investment expenditures on capital goods or
if government decides to expand the size of the already bloated
federal deficit by spending more on national defense, then our
economy's production and income are likely to increase by some
multiple of this spending. The amplified increase in production
and income, usually from 2 to 5 times, is what gives us the term
"multiplier." The process is based on the circular flow idea the
people receive income by producing goods and then spend this
income on additional production.
RECOVERY:

A early expansionary phase of the business
cycle shortly after a contraction has ended,
but before a full-blown expansion begins.
During a recovery, the unemployment rate
remains relatively high, but it is beginning to
fall. Real gross domestic product has begun
to increase, usually rapidly. However, because
the contraction remains fresh in the minds of
many, it may not be immediately clear that
the trough of the contraction has been
reached.
PEAK:

The transition of a business cycle from an
expansion and a contraction. The end of an
expansions carries the descriptive term peak.
At the peak, the economy has reached the
highest level of production in recent times.
The bad thing about a peak, however, is that
it is a turning point, a turning point to a
contraction. So even though a peak is the
"highest" is not necessarily something we
want. We would prefer never to reach the
peak.
LEADING ECONOMIC
INDICATOR:

One of eleven economic statistics that tend to move up or down
a few months before the expansions and contractions of the
business cycle. These leading indicators are -- manufacturers
new orders, an index of vendor performance, orders for plant
and equipment, Standard & Poor's 500 index of stock prices,
new building permits, durable goods manufacturers unfilled
orders, the money supply, change in materials prices, average
workweek in manufacturing, changes in business and consumer
credit, a consumer confidence index, and initial claims for
unemployment insurance. Leading indicators indicate what the
aggregate economy is likely to do, business-cycle-wise, 3 to 12
months down the road. When leading indicators rise today, then
the rest of the economy is likely to rise in the coming year. And
when leading indicators decline, then the economy is likely to
decline in 3 to 12 months.
CONSUMER CONFIDENCE:

In general, this is the notion of how much confidence
that consumers (the public) have in the present and
future performance of the economy. Consumer
confidence is a key determinant of the aggregate
demand curve and the source of business-cycle
instability. A sudden drop in consumer confidence can
trigger a contraction, while overly optimistic
consumers can keep an economy expanding, even
though it shouldn't. Consumer confidence is generally
measured by periodic surveys which ask consumers
about their degree of confidence in the economy.
KEYNES, JOHN MAYNARD:

A British economist (born--1883, died--1946) who is
most noted for his work The General Theory of
Employment, Interest, and Money, published
1936. The The General Theory revolutionized
economic theory of the day, forming the foundation
of Keynesian economics and creating the modern
study of macroeconomics. Keynes was a well-known
and highly respected economist prior to publication of
The General Theory, however, this revolutionary
work guaranteed Keynes a place as one of the most
influential economists of all time.
KNOWLEDGE ECONOMY:

The notion that economic activity is oriented on the
production and consumption of knowledge (or
information), which is fundamentally different from
economic activity oriented on the production and
consumption of manufacturing or agricultural goods.
The key to the knowledge economy is the widespread
use of computers, the Internet, and other
information-based technology. Differences in the
knowledge economy result for the public goods
nature of knowledge and information (that is, use by
one does not exclude use by another).
LAFFER CURVE:

The graphical inverted-U relation between tax rates and total
tax collections by government. Developed by economist Arthur
Laffer, the Laffer curve formed a key theoretical foundation for
supply-side economics of President Reagan during the 1980s. It
is based on the notion that government collects zero revenue if
the tax rate is 0% and if the tax rate is 100%. At a 100% tax
rate no one has the incentive to work, produce, and earn
income, so there is no income to tax. As such, the optimum tax
rate, in which government revenue is maximized, lies
somewhere between 0% and 100%. This generates a curve
shaped like and inverted U, rising from zero to a peak, then
falling back to zero. If the economy is operating to the right of
the peak, then government revenue can be increased by
decreasing the tax rate. This was used to justify supply-side
economic policies during the Reagan Administration, especially
the Economic Recovery Tax Act of 1981 (Kemp-Roth Act).
SUPPLY-SIDE ECONOMICS:

A branch of economics that emphasizes the
productive capabilities of resources, especially in the
context of macroeconomic instability and economic
growth. Supply-side economics became popular in
the 1980s after several decades of Keynesian
"demand-side" economics. Supply-side proponents
contended that policies aimed at the demand-side
alone, especially fiscal policies, was causing economic
stagnation. One note result of supply-side economics
was the developed of the aggregate market, which
combined existing demand-side economics with the
newly emerging focus on the supply-side.
AGGREGATE MARKET:

An economic model relating the price level
and real production that is used to analyze
business cycles, gross domestic product,
unemployment, inflation, stabilization policies,
and related macroeconomic phenomena. The
aggregate market, inspired by the standard
market model, captures the interaction
between aggregate demand (the buyers) and
short-run and long-run aggregate supply (the
sellers).
CLASSICAL ECONOMICS:

A body of economic thought originating with
the work of Adam Smith based on the idea
that the operation of unrestricted markets
generates aggregate or national production
that fully utilizes the economy's resources and
maintains full employment. The three primary
assumptions of classical economics are
flexible prices, Say's law, and the savinginvestment equality.
TAX AVOIDANCE:

legal reduction in taxes. The complexity of our system of taxes,
especially income taxes, makes it extremely worthwhile to
identify the mix of spending, working, and assorted activities
that reduce taxes. This has also created a major industry of
accountants, lawyers, educators, public speakers, and others
who spend their efforts uncovering legal tax loopholes. In terms
of the big efficiency picture, this is a waste of resources. Our
lives would, in general, be better off if this tax avoidance
industry devoted it's efforts to increasing gross domestic
product rather than diverting it from one pocket to another.
This, though, is not a fault of theirs, but of the tax system itself.
TAX EVASION:

An illegal reduction in taxes. Tax
evasion occurs when someone fails to
pay their legal taxes. This is the sort of
thing that leads to a prison sentence.
Ethical considerations aside, it is also
the sort of thing that's likely to happen
if tax rates are high or unpopular.
INTERNAL REVENUE
SERVICE:

(IRS) An agency of the U. S.
Department of Treasury with the
responsibility of collecting taxes. It was
established during the Civil War in
1862, but underwent a major overhaul
in 1913 when the 16th amendment to
the U. S. Constitution gave it the power
to collect income taxes.
EFFICIENCY:

Obtaining the most possible satisfaction from
a given amount of resources. Efficiency for
our economy is achieved when we can not
increase our satisfaction of wants and needs
by producing more of one good and less of
another. This is one of the five economic
goals, specifically one of the two micro goals
(the other being equity).
TARIFFS:

Taxes that are usually on imports, but occasionally
(very rarely) on exports. This is one form of trade
barrier that's intended to restrict imports into a
country. Unlike nontariff barriers and quotas which
increase prices and thus revenue received by
domestic producers, a tariff generates revenue for
the government. Most pointy-headed economists who
spend their waking hours pondering the plight of
foreign trade contend that the best way to restrict
trade, if that's what you want to do, is through a
tariff.
TRADE BARRIER:

A restriction, invariably by government, that prevents free trade
among countries. The more popular trade restrictions are tariffs,
import quotas, and assorted nontariff barriers. An occasional
embargo will be even thrown into this mix. The primary use of
trade barriers is to restrict imports from entering in country. By
restring imports, domestic producers of the restricted goods are
protected from competition and are even subsidized through
higher prices. Consumers, though, get the short end of this stick
with higher prices and a limited choice of goods. In that
producers tend to have more political clout than consumers, it's
pretty obvious why trade barriers are a "natural" state of affairs.
GATT:

The abbreviation for the General Agreement
on Tariffs and Trade. A treaty, signed in 1947
by 23 countries including the United States,
that was designed to reduce trade barriers. It
now carries the signatures of about 100
countries and over the years has been pretty
darn effective in reducing tariffs, eliminating
some import quotas, and promoting
commerce.
WTO:

The abbreviation for World Trade Organization, which
is an international organization that oversees
multilateral trade among nations. The WTO was
established in 1995 by the Uruguay round of trade
negotiations to replace the General Agreement on
Tariffs and Trade (GATT) that had been in place for
the preceding five decades. The WTO administers
multilateral trade agreements, provides a forum for
trade negotiations, handles trade disputes, monitors
national trade policies, and provides technical
assistance and training for developing countries. The
WTO has about 150 member countries.
UNILATERAL:

An action, often used in terms of an
international trade agreement, that's
extended to only one party. For example, the
United States might enter into a unilateral
agreement with Canada over the employment
of Canadian hockey players in the United
States. The agreement, though, would have
nothing to do with U. S. hockey players in
Canada.
MULTILATERAL:

An action, often used in terms of an international
trade agreement, that's extended to more than two
parties. As such, a multilateral trade agreement is
between several countries. For example, the United
States might enter into a multilateral agreement with
every country in North and South America that
reduces trade barriers on the exports and imports of
food products. The General Agreement on Tariffs and
Trade is one of the more well known examples of a
multilateral trade agreement.
BILATERAL:

An action, often used in terms of an
international trade agreement, that mutually
affects two parties. As such, a bilateral trade
agreement is one negotiated by two
countries. For example, the United States
might enter into a bilateral agreement with
Germany over car sales, such that each
agrees to restrict the number of imports from
the other. Compare multilateral, unilateral.
LAW OF DIMINISHING
MARGINAL UTILITY:

The principle stating that as more of a good
is consumed, eventually each additional unit
of the good provides less additional utility-that is, marginal utility decreases. Each
subsequent unit of a good is valued less than
the previous one. The law of diminishing
marginal utility helps explain the negative
slope of the demand curve and the law of
demand.
LAW OF INCREASING
OPPORTUNITY COST:

The proposition that opportunity cost, the
value of foregone production, increases as
more of a good is produced. This "law" can
be seen in the production possibilities
schedule and is illustrated graphically through
the slope of the production possibilities curve.
It generates the distinctive convex shape of
the curve, making it flat at the top and steep
at the bottom.
SATISFACTION:

The process of successfully fulfilling wants
and needs. A basic fact of life is that people
want and need stuff to stay alive and to make
that life more enjoyable. Satisfaction is the
economic term that captures this wants-andneeds-fulfilling process. Satisfying wants and
needs is actually the ultimate goal of
economic activity, the end result of
addressing the fundamental problem of
scarcity, and, when you get right down to it,
life itself.
UTILITY:

The satisfaction of wants and needs obtained from
the use or consumption of goods and services. The
terms utility and satisfaction are, for the most part,
used interchangeably in economics. Two other
somewhat technical economic terms frequently used
to capture this notion are welfare and well-being.
Whichever term is used, the underlying concept is
the same: To what extent are unlimited wants and
needs fulfilled using the goods and services produced
from society's limited resources.
USER CHARGE:

A tax that's disguised as a price--a charge for
the use of a publicly provided good.
Government produces and supplies a number
of near-public goods, like education, libraries,
parks, and transportation systems. The
"prices" for these goods are user charges.
The logic is that people who benefit from the
good and are willing to pay, should pay for
them. While this helps pay production costs,
it tends to be inefficient.
SOCIAL SECURITY TAX:

A tax on wage earnings that's used to fund the Social
Security system. In principle, the Social Security tax
is divided equally between employer and employee-your share is listed under the FICA heading of your
paycheck. In practice, however, employees really end
up paying both employee and employer contributes.
The reason is that employers need to consider the
entire cost of hiring an employee, including wages,
fringe benefits, and assorted taxes. The more they
pay in these nonwage items, like Social Security
taxes, the less they pay in wages. In that the Social
security tax is only on earnings, and excludes profit,
interest, and rent, it tends to be a regressive tax.
PAYROLL TAX:

A tax levied on the wage earnings, or
payroll, of workers. The most notable, if
nothing else in terms of sheer dollar
amount, is the Social Security tax.
ZERO GROWTH:

A growth rate (usually in terms of population)
that is equal to zero. In other words, this is
no change from one year to the next. This
goal has been proposed by those who
content that population growth is placing
excessive pressure on the planet's availability
of limited resources and its ability to
assimilate pollution. In general terms, zero
growth can apply to any measurement,
including production, prices, etc.
ZERO-BASE BUDGET:

A method of budgeting expenditures in which each
expenditure is justified on its overall merits rather
than being based on the budget for the previous
year. A zero-base budget is most often proposed (but
seldom implemented) for governments. Governments
generally establish budget expenditures based on
expenditures for the previous year. If, for example,
budget expenditures last year were $100 billion, the
requested budget for this year might be set at $110
billion. The existing $100 billion is a "given" and only
the extra $10 billion is justified. With a zero-base
budget, the entire $110 billion is justified.
ZERO-SUM GAME:

A situation in which a fixed amount is divided up
among the winners and losers. In a zero-sum game
the wins equal the losses. Many stock market, or
financial market, exchanges are zero-sum. One
person buys low and sells high, while another buys
high and sells low. The wealth in such transactions
are merely transferred from one person to another.
"Productive" market transactions, in contrast, are not
zero-sum. The act of producing goods and services
from resources that are consumed to satisfy wants
and needs results in a net gain to society.
YIELD:

The rate of return on a financial asset. In some simple cases,
the yield on a financial asset, like commercial paper, corporate
bond, or government security, is the asset's interest rate.
However, as a more general rule, the yield includes both the
interest earned from an asset plus any changes in the asset's
price. Suppose, for example, that a $100,000 bond has a 10
percent interest rate, such that the holder receives $10,000
interest per year. If the price of the bond increases over the
course of the year from $100,000 to $105,000, then the bond's
yield is greater than 10 percent. It includes the $10,000 interest
plus the $5,000 bump in the price, giving a yield of 15 percent.
Because bonds and similar financial assets often have fixed
interest payments, their prices and subsequently yields move up
and down as economic conditions change.
WILLINGNESS TO PAY:

The price or dollar amount that someone is willing to
give up or pay to acquire a good or service.
Willingness to pay is the source of the demand price
of a good. However, unlike demand price, in which
buyers are on the spot of actually giving up the
payment, willingness to pay does not require an
actual payment. This concept is important to benefitcost analysis, welfare economics, and efficiency
criteria, especially Kaldor-Hicks efficiency. A related
concept is willingness to accept.
WEALTH:

The net ownership of material possessions and
productive resources. In other words, the difference
between physical and financial assets that you own
and the liabilities that you owe. Wealth includes all of
the tangible consumer stuff that you possess, like
cars, houses, clothes, jewelry, etc.; any financial
assets, like stocks, bonds, bank accounts, that you
lay claim to; and your ownership of resources,
including labor, capital, and natural resources. Of
course, you must deduct any debts you owe.
VALUE:

Quite simply, this is the amount of consumer
satisfaction directly or indirectly obtained
from a good. service, or resource. The more
a good satisfies a person's want or need,
then the more valuable it is to that person.
Furthermore, different people are likely to
place different values on a good. Resources
are valuable to the degree that they are used
to produce stuff that consumers want. The
bottom line is that value, like beauty, is truly
in the eye of the beholder.
VOTING PARADOX:

The observation that voting by a relatively small
group of people might generate a intransitive or
inconsistent ranking of three or more alternatives,
creating a paradox of rankings. The preferences of
rational individuals are generally assumed to
transitive and consistent, that is, if a person prefers A
to B and B to C, then the person also prefers A to C.
However, the preferences of group of voters might
not be consistent. That is, as a group, voters might
prefer A to B and B to C, but then prefer C to A. This
is not only paradoxical and confusing, it also can be
inefficient.
PUBLIC CHOICE:

A branch of economics that applies
economic analysis to public (that is,
government) decision-making, including
voting behavior, legislative law-making,
and related issues. Some of the more
noted public choice principles include
the voting paradox, logrolling, and the
principle of the median voter.
FIFTH RULE OF
IMPERFECTION:

The fifth of seven basic rules of the
economy. It is the observation that the
real world is not perfect. This means
markets often fail to achieve efficiency
because of several failings. This also
means that government seldom enacts
the policies needed to correct market
failings. We are usually faced with the
lesser of evils.
PRINCIPLE OF THE MEDIAN
VOTER:

A voting principle stating that the median
voter determines the outcome of an election
governed by majority rule. The median voter
is the one with an equal number of voters on
either side of the vote. As such, the vote cast
by THE median voter is the deciding or
majority vote. However, this median voter's
preference might not generate the best, that
is, efficient, result.
TIEBOUT HYPOTHESIS:

The notion that people relocate from one political
jurisdiction to another in search of a more preferred
package of government taxes and spending. This
hypothesis suggests that people "shop" for
compatible government activity in the same way they
might shop for a car, a house, or a flavor of ice
cream. The Tiebout hypothesis indicates that people
have two methods of "voting" on government activity
-- one is at the ballot box the other is with their feet
by seeking a more preferred location.
SUPER MAJORITY RULE:

A voting rule in which decisions are made
based on a specified fraction of votes greater
than 50 percent and less than 100 percent.
For example, a super majority of two-thirds is
required for Congress to override a legislative
veto by the President. A growing number of
state and local governments require a super
majority approval, usually in the range of 60
to 75 percent, for an increase in taxes. This is
one of several voting rules. Others include
majority, unanimity, and plurality.
VERTICAL EQUITY:

A system of taxes that treats unequal
people unequally. In other words, if you
make the less income than someone
else and pay fewer personal income
taxes, then we have vertical equity.
HORIZONTAL EQUITY:

A system of taxes that treats equal
people equally. In other words, if you
make the same income as someone
else and pay the same personal income
taxes, then you have horizontal equity.