GLOSSARY 341
Commodity A general term for
any product or service that can
be traded. Often used in economics
to refer to raw materials that are
always of approximately the same
quality and can be bought in bulk.
Communism A Marxist economic
system in which property and
the means of production are
collectively owned.
Comparative advantage The
ability of a country to produce a
product relatively more efficiently
than another country, even if the
other country is more efficient overall.
Competition Competition arises
when two or more producers
attempt to win the business of a
buyer by offering the best terms.
Consumption The value of goods
or services purchased. Individual
buying acts are aggregated by
governments to calculate a figure
for national consumption.
Credit crunch A sudden reduction
in the availability of credit in a
banking system. A credit crunch
often occurs after a period in which
credit is widely available.
Debt A promise made by one party
(the debtor) to another (the creditor)
to pay back a loan.
Default The failure to repay a loan
under the terms agreed.
Deficit An imbalance. A trade
deficit is an excess of imports
over exports; a government budget
deficit is an excess of spending over
tax revenues.
Deflation A fall in the price of
goods and services over time.
Deflation is associated with periods
of economic stagnation.Demand The amount of goods and
services that a person or group of
people are willing and able to buy.Demand curve A graph showing
the amount of a product or service
that will be bought at different prices.Dependency theory The idea that
resources and wealth flow from poor
countries to rich countries in such
a way that the poor countries are
unable to develop.Depreciation A decrease in the
value of an asset over time, caused
by wear and tear or obsolescence.Depression A severe, long-term
decline in economic activity in
which output slumps, unemployment
rises, and credit is scarce.Diminishing marginal returns
A situation in which each extra unit
of something produces successively
smaller benefits.Duopoly A situation in which
two firms have control over a market.Economic liberalism An ideology
claiming that the greatest good is
achieved when people are given
the maximum personal freedom to
make choices over consumption.
Economic liberalism advocates a
free market economy.Economy The total system of
economic activity in a particular
country or area, comprising all the
production, labor, trade, and
consumption that take place.Elasticity The sensitivity of one
economic variable (such as demand)to another (such as price). Prices of
products may be elastic or inelastic.Entrepreneur A person who
undertakes commercial risk in
the hope of making a profit.Equilibrium A state of balance
within a system. In economics,
markets are in equilibrium when
supply equals demand.Eurozone Countries within the
European Union that have formed
a monetary union. They all use
the same currency, the euro, and
monetary policy is controlled by
the European Central Bank.Exchange rate The ratio at
which one currency can be
exchanged for another. An exchange
rate is the price of a currency in
terms of other currencies.Externality A cost or benefit from
any economic activity that is felt by
a person not directly involved in that
activity and is not reflected in price.Factors of production The inputs
used to make products or services:
land, labor, capital, and enterprise.Fiat money A form of money
that is not backed by a physical
commodity such as gold, but gains
its value from the confidence people
have in it. The world’s main
currencies are fiat money.Fiscal policy A government’s
plans for taxes and spending.Free market economy An
economy in which decisions about
production are made by private
individuals and companies on the
basis of supply and demand, and
prices are determined by the market.