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absolute advantage The ability to produce more of
a good than all other producers.
absolute (or money) prices The price of a good
measured in units of currency.
aggregate demand curve The negative relationship
between all spending on domestic output and the
aggregate price level of that output.
aggregate income The sum of all income earned by
suppliers of resources in the economy.
aggregate spending (GDP) The sum of all spend-
ing from four sectors of the economy.
aggregation The process of summing the micro-
economic activity of households and firms into a
macroeconomic measure of economic activity.
all else equal The assumption that all other vari-
ables are held constant so that we can predict how
a change in one variable affects a second. Also
known as the “ceteris paribus” assumption.
appreciating currency An increase in the price of
one currency relative to another currency.
asset demand for money The amount of money
demanded as an asset is inversely related to the real
interest rate.
assets of a bank Anything owned by the bank or
owed to the bank.
automatic stabilizers Fiscal policy mechanisms that
automatically regulate, or stabilize, the macroecon-
omy as it moves through the business cycle.
autonomous consumption The amount of con-
sumption that occurs no matter the level of dispos-
able income.
autonomous investment The level of investment
determined by investment demand and independ-
ent of GDP.
autonomous saving The amount of saving that
occurs no matter the level of disposable income.
balanced-budget multiplier A change in govern-
ment spending offset by an equal change in taxes
results in a multiplier effect equal to one.
balance of payments statement A summary of
the payments received by the United States from
foreign countries and the payments sent by the
United States to foreign countries.balance sheet or T-account A tabular way to show
a bank’s assets and liabilities.
base (or reference) year The year that serves as a
reference point for constructing a price index and
comparing real values over time.
bond A certificate of indebtedness from the issuer to
the bond holder.
budget deficit Exists if government spending
exceeds the tax revenue collected.
budget surplus Exists if tax revenue collected
exceeds government spending.
business cycle The periodic rise and fall in eco-
nomic activity around its long-term growth trend.
capital (or financial) account This account shows
the flow of investment on real or financial assets
between a nation and foreigners.
capitalist market system (capitalism) An economic
system based upon the fundamentals of private
property, freedom, self-interest, and prices.
circular flow of economic activity (or circular flow
of goods and services) A model that shows how
households and firms circulate resources, goods,
and incomes through the economy. This basic
model is expanded to include the government and
the foreign sector.
Classical school A macroeconomic model that
explains how the economy naturally tends to come
to full employment in the long run.
closed economy A model assuming no foreign
sector (imports and exports).
comparative advantage The ability to produce
a good at lower opportunity cost than all other
producers.
complementary goods Two goods that provide
more utility when consumed together than when
consumed separately.
consumer price index (CPI) The price index that
measures the average price level of the items in the
base year market basket. The change in the CPI is
the main measure of consumer inflation.
consumer surplus The difference between a buyer’s
willingness to pay and the price actually paid.Glossary
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