Economics Vocabulary & Definitions

Instructor: Dr. Douglas Hawks

Douglas has two master's degrees (MPA & MBA) and a PhD in Higher Education Administration.

Understanding even the most basic economic lesson can be a challenge without a fundamental understanding of some common terms. In this lesson, we'll define some of the often used words in the study of an economy.

The Study of Economics

As the primary discipline focused on how individuals, organizations, and nations behave in relation to the allocation of resources, economics uses a number of terms that mix finance, psychology, accounting, and business. These terms are important to understand because whether you want to be an economist or not, as a market participant - someone that is part of an economy - they will influence your decision making and you will feel the impact of others' decision making as well.

Common Terms in Economics

Instead of just giving you a list of words and definitions, let's try to start from the group up - at least as much as we can with these concepts. Discussed in any acceptable definition of economics, the most basic concern of economics is how natural resources - things like land, water, metals, etc. - are allocated among market participants. Some theories, capitalism, for example, would say that the market participant who is willing to pay the most, gets the resource. Other theories, socialism, for example, believe that the government can allocate resources most effectively.

Those resources are important to allocate because of scarcity. Scarcity is a measure of how rare a resource is in the economy. In a capitalist economy, the willingness of a participant to dedicate the most capital, or money, towards obtaining a resource is a market signal of how badly they want that resource.

Economics also makes some assumptions about the behaviors of market participants. One of the most basic is that participants have incentives - reasons to act a certain way - that will result in the best outcome for themselves, whether that is as an individual, organization, or nation.

Common Terms in Macroeconomics

In the field of macroeconomics, or the study of economies as a whole, versus microeconomics, the study of individual market participants, different metrics and practices are studied. For example, in macroeconomics, one of the most important and commonly used terms is gross domestic product, or GDP. Gross domestic product is the total value of all goods and services produced by an economy in a given period of time, usually annually. The economy may be a city, state, nation, region, or even the whole world, but it represents the market value of all goods produced and services rendered.

As you might imagine, GDP is a pretty large number. Take a guess what it is for the United States. How many millions of dollars? Billions of dollars? TRILLIONS of dollars? In 2014, the GDP for the United States, which has the world's largest GDP, was $17.4 trillion dollars. Imagine, if you can, a million dollars. Now imagine two million. Now imagine 17 million million. That's a lot of economic activity!

States and nations want their economies to grow, which would mean an increase in their GDP. One of the ways they do this is through exports, which are the goods produced within a country and then sold outside the country. That brings money into the economy, while imports, or goods produced outside the country but brought into the country, send money out of the country. This back and forth is the essence of a trade economy.

In a trade economy, there are ways nations can try to encourage or discourage trade. Two of the most common are tariffs and trade embargos. Tariffs are simply taxes that a country may put on a certain type of import. By doing that, it makes the same good produced in the home country cheaper, relative to the imports, since the price of imports includes a tax. For example, China has a 105% import tax on U.S. poultry, meaning that if a poultry company in the U.S. wants to export a pound of chicken for $3, they have to pay China $3.15 to be able to sell it in China.

Sometimes, economics becomes political. When a country wants to hurt another country's economy, like the U.S. has in the past to Iraq, North Korea, Iran, Cuba, and other nations at other times, they may use a trade embargo. A trade embargo limits or eliminates trade with another country, significantly limiting the market size of the goods coming from the country under the embargo. For example, when the U.S. embargoed oil from Iraq and Iran, it had the same effect as those countries losing their largest customer.

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