Appendix A — Glossary

Autarky: Autarky is the characteristic of self-sufficiency; the term usually applies to political states or their economic systems. Autarky exists whenever an entity survives or continues its activities without external assistance or international trade.

Balance of payments: The balance of payments, also known as balance of international payments and abbreviated B.O.P. or BoP, of a country is the record of all economic transactions between the residents of the country and the rest of the world in a particular period of time (e.g., a quarter of a year). These transactions are made by individuals, firms, and government bodies. Thus, the balance of payments includes all external visible and non-visible transactions of a country. It is an important issue to be studied, especially in the international financial management field.

Balance of trade: The balance of trade, commercial balance, or net exports (sometimes symbolized as NX), is the difference between the monetary value of a nation’s exports and imports over a certain time period.

Balanced trade: When the value of exports equals the value of imports.

Budget constraint line: Shows the possible combinations of two goods that are affordable given a consumer’s limited income.

Closed economy: If a self-sufficient economy also refuses to conduct any trade with the outside world, then economists may term it a “closed economy.”

Complements: Goods that go together; a decrease in the price of one results in an increase in demand for the other, and vice versa.

Competitive market: A market in which there are many buyers and many sellers, ensuring that no single buyer or seller can significantly impact the market price.

Consumer equilibrium: Occurs when the ratio of the prices of goods is equal to the ratio of the marginal utilities, indicating the point at which a consumer achieves maximum satisfaction.

Deadweight loss: The loss in social surplus that occurs when a market produces an inefficient quantity of goods.

Demand: Refers to the willingness and ability of consumers to purchase a quantity of a good or service at a given point in time or over a period.

Demand curve: A graph illustrating how much of a given product a household would be willing to buy at different prices.

Demand schedule: A table that shows the relationship between the price of a good and the quantity demanded.

Diminishing marginal utility: The principle that each additional unit of a good consumed provides less additional satisfaction than the previous unit.

Elasticity: A concept used to quantify the responsiveness of one variable when another variable changes.

Equilibrium: The condition that exists when the quantity supplied equals the quantity demanded, resulting in no tendency for price changes.

Excess demand: The condition where the quantity demanded exceeds the quantity supplied at the current price.

Excess supply: The condition where the quantity supplied exceeds the quantity demanded at the current price.

Export: An export in international trade is a good or service produced in one country that is bought by someone in another country. The seller of such goods and services is an exporter; the foreign buyer is an importer.

Giffen good: A type of good for which an increase in price leads to an increase in quantity demanded, contrary to the basic law of demand.

Import: An import in the receiving country is an export from the sending country. Importation and exportation are the defining financial transactions of international trade.

Indifference curve: In economics, an indifference curve connects points on a graph representing different quantities of two goods, points between which a consumer is indifferent. That is, any combinations of two products indicated by the curve will provide the consumer with equal levels of utility, and the consumer has no preference for one combination or bundle of goods over a different combination on the same curve.

Inferior good: A good for which an increase in income results in a decrease in demand.

International trade: International trade is the exchange of capital, goods, and services across international borders or territories.

Labor demand: Refers to the amount of work that employers are willing to hire at a given wage.

Labor supply: Refers to the amount of time workers are willing to work at a given wage.
Law of demand: The principle that, other things being equal, the quantity demanded of a good falls when the price of the good rises.

Law of supply: The principle that, other things being equal, the quantity supplied of a good rises when the price of the good rises.

Marginal utility: The additional satisfaction gained from consuming one more unit of a good.

Marginal utility per dollar: The additional satisfaction gained from purchasing a good adjusted by the product’s price; calculated as MU/Price.

Market: A group of buyers and sellers engaged in the exchange of a particular good or service.

Market-clearing price: An alternative term for market equilibrium; it refers to the fact that the market is cleared of all unsatisfied demand and excess supply at the equilibrium price.

Net capital outflow: The difference between the purchase of foreign assets by domestic residents and the purchase of domestic assets by foreigners. This equals net exports, indicating that a country’s savings can fund investments domestically or abroad. We will elaborate on that later on in greater detail.

Normal good: A type of good for which an increase in income or a decrease in price leads to an increase in demand.

Perfectly competitive market: A market characterized by the identical nature of goods offered for sale and a large number of buyers and sellers, ensuring no single entity can influence the market price.

Perfect substitutes: Goods that are identical in nature and can be used in place of one another.

Price ceiling: A legally mandated maximum price that sellers may charge for a good, typically set by the government.

Price control: Government regulations aimed at influencing the prices of goods and services rather than allowing market forces to determine them.

Price floor: A legally mandated minimum price set by the government.

Producer surplus: The extra benefit producers receive from selling a good, calculated as the price received minus the minimum acceptable price.

Production-possibility frontier: A production–possibility frontier (PPF) or production possibility curve (PPC) is a curve that shows various combinations of the amounts of two goods that can be produced within the given resources and technology— a graphical representation showing all the possible options of output for two products that can be produced using all factors of production, where the given resources are fully and efficiently utilized per unit time.

Protectionism: Protectionism is the economic policy of restricting imports from other countries through methods such as tariffs on imported goods, import quotas, and a variety of other government regulations.

Quantity demanded: The total amount of a good that buyers are willing and able to purchase at a given price.

Quantity supplied: The total amount of a particular good that sellers are willing and able to sell at a given price.

Subsidy: An economic incentive given to remove some type of burden in the interest of market welfare; a subsidy drives a wedge, decreasing the price consumers pay.

Substitutes: Goods that can be used in place of one another; when the price of one increases, demand for the other often rises.

Supply: The willingness and ability of producers to create goods and services and bring them to market.

Supply curve: A graph that illustrates the quantity of a good that a firm will supply at various price levels.

Tariff: A tariff is a tax on imports or exports between sovereign states. It is a form of regulation of foreign trade and a policy that taxes foreign products to encourage or safeguard domestic industry. Traditionally, states have used them as a source of income. They are now among the most widely used instruments of protectionism, along with import and export quotas.

Tax: Money collected by a government from buyers or sellers, directly or indirectly, in exchange for services provided to the community.

Total utility: The overall satisfaction derived from consuming a certain quantity of goods or services.

Trade: Trade involves the transfer of goods or services from one person or entity to another, often in exchange for money. Economists refer to a system or network that allows trade as a market.

Trade balance: The difference between the value of goods and services a country sells abroad and those it buys from abroad, also known as net exports.

Trade surplus: When a country sells more than it buys, resulting in a positive trade balance.

Trade deficit: When a country buys more than it sells, leading to a negative trade balance.

Trade barrier: Trade barriers are government-induced restrictions on international trade.

Trade war: A trade war is an economic conflict resulting from extreme protectionism in which states raise or create tariffs or other trade barriers against each other in response to trade barriers created by the other party.

Utility: Within economics, the concept of utility is used to model worth or value. Its usage has evolved significantly over time. The term was introduced initially as a measure of pleasure or satisfaction within the theory of utilitarianism by moral philosophers such as Jeremy Bentham and John Stuart Mill. The term has been adapted and reapplied within neoclassical economics, which dominates modern economic theory, as a utility function that represents a consumer’s preference ordering over a choice set. It is devoid of its original interpretation as a measurement of the pleasure or satisfaction obtained by the consumer from that choice.