absolute advantagethe advantage con-
ferred by the ability to produce more of
a good or service with a given amount
of time and resources; not the same
thing as comparative advantage. (p. 27)
accounting profita business’s revenue
minus the explicit costand deprecia-
tion. (p. 531)
actual investment spendingthe sum of
planned investment spending and
unplanned inventory investment. (p. 169)
AD–ASmodel the basic model used to
understand fluctuations in aggregate
outputand the aggregate price level.It
uses the aggregate demand curveand the
aggregate supply curvetogether to ana-
lyze the behavior of the economyin
response to shocks or government pol-
icy. (p. 190)
administrative costs (of a tax)the
resourcesused (which is a cost) by
government to collect the tax, and by
taxpayers to pay it, over and above
the amount of the tax, as well as to
evade it. (p. 508)
adverse selectionoccurs when an
individual knows more about the way
things are than other people do.
Adverse selection problems can lead to
market problems: private information
leads buyers to expect hidden prob-
lems in items offered for sale, leading
to low prices and the best items being
kept off the market. (p. 783)
aggregate consumption functionthe
relationship for the economyas a
whole between aggregate current
disposable incomeand aggregate
consumer spending.(p. 164)
aggregate demand curveshows the
relationship between the aggregate
price leveland the quantity of aggregate
outputdemanded by households,
businesses,the government, and the
rest of the world. (p. 172)
aggregate outputthe economy’s total
production of final goods and services
for a given time period, usually a year.
Real GDPis the numerical measure of
aggregate output typically used by
economists. (pp. 12, 113)
aggregate price levela measure of the
overall level of prices in the economy.
(p. 142)
aggregate production functiona hypo-
thetical function that shows how pro-
ductivity (real GDPper worker)
depends on the quantities of physical
capitalper worker and human capital
per worker as well as the state of tech-
nology. (p. 376)
aggregate spendingthe total spending
on domestically produced final goods
and services;the sum of consumer
spending(C),investment spending(I),
government purchases of goods and serv-
ices(G), and exportsminusimports
(X−IM). (p. 106)
aggregate supply curvea graphical
representation that shows the rela-
tionship between the aggregate price
leveland the total quantity of aggregate
outputsupplied. (p. 179)
antitrust policylegislative and regula-
tory efforts undertaken by the govern-
ment to prevent oligopolistic indus-
tries from becoming or behaving like
monopolies.(p. 653)
appreciationa rise in the value of one
currency in terms of other currencies.
(p. 422)
artificially scarce gooda good that is
excludablebutnonrival in consumption.
(p. 751)
automatic stabilizersgovernment
spending and taxation rules that cause
fiscal policyto be automatically expan-
sionary when the economycontracts
and automatically contractionary
when the economy expands. Taxes
that depend on disposable incomeare
the most important example of auto-
matic stabilizers. (p. 212)
autonomous change in aggregate spend-
ingan initial rise or fall in aggregate
spendingthat is the cause, not the
result, of a series of income and
spending changes. (p. 160)
autonomous consumer spendingthe
amount of money a householdwould
spend if it had no disposable income.
(p. 162)
average cost pricingoccurs when reg-
ulators set a monopoly’s price equal to
its average cost to prevent the firm
from incurring a loss. (p. 757)
average fixed costthe fixed costper
unit of output. (p. 553)
average total costtotal costdivided by
quantity of output produced. Also
referred to as average cost.(p. 552)
average variable costthe variable cost
per unit of output. (p.553)
balance of payments accounts a sum-
mary of a country’s transactions withother countries, including two main
elements: the balance of payments on
the current accountand the balance of
payments on the financial account.
(p. 410)
balance of payments on the current
account (current account)a country’s
balance of payments on goods and services
plus net international transfer pay-
ments and factor income. (p. 412)
balance of payments on the financial
account (financial account)the differ-
ence between a country’s sales of
assets to foreigners and its purchases
of assets from foreigners during a
given period. (p. 413)
balance of payments on goods and serv-
icesthe difference between the value
ofexportsand the value of imports
during a given period. (p. 412)
balance sheet effectthe reduction in
a firm’s net worth from falling asset
prices. (p. 258)
bankafinancial intermediarythat pro-
videsliquidassets in the form of bank
depositsto lenders and uses those
funds to finance the illiquidinvest-
ments or investment spendingneeds of
borrowers. (p. 229)
bank deposita claim on a bank that
obliges the bank to give the depositor
his or her cash when demanded.
(p. 229)
bank reservescurrency held by banks
in their vaults plus their deposits at
the Federal Reserve. (p. 243)
bank run a phenomenon in which
many of a bank’sdepositors try to
withdraw their funds due to fears of a
bank failure. (p. 246)
barrier to entrysomething that pre-
vents other firms from entering an
industry. Crucial in protecting the
profits of a monopolist.There are four
types of barriers to entry: control over
scarceresourcesorinputs, increasing
returns to scale, technological superi-
ority, and government-created barriers
such as licenses. (p. 571)
black marketa market in which goods
or services are bought and sold illegal-
ly, either because it is illegal to sell
them at all or because the prices
charged are legally prohibited by a
price ceiling.(p. 81)
bondloan in the form of an IOU that
pays interest. (p. 104)Glossary
G-1
Italicized termswithin definitions are key terms that are defined elsewhere in this glossary.