A  B  C  D  E  F  G  H  I  J  K  L  M  N  O  P  Q  R  S  T  U  V  W  X  Y  Z



A

Absolute advantage The ability of one person or nation to produce a product at a lower resource cost than another person or nation.

Accounting cost The explicit costs of production.

Accounting profit Total revenue minus accounting cost.

Adverse-selection problem A situation in which the uninformed side of the market must choose from an undesirable or adverse selection of goods.

Aggregate demand curve (AD) A curve that shows the relationship between the level of prices and the quantity of real GDP demanded.

Aggregate supply curve (AS) A curve that shows the relationship between the level of prices and the quantity of output supplied.

Anticipated inflation Inflation that is expected.

Appreciation of a currency An increase in the value of a currency relative to the currency of another nation.

Assets The uses of the funds of a bank, including loans and reserves.

Asymmetric information A situation in which one side of the market—either buyers or sellers—has better information than the other.

Automatic stabilizers Taxes and transfer payments that stabilize GDP without requiring policy makers to take explicit action.

Autonomous consumption spending The part of consumption spending that does not depend on income.

Autonomous consumption The part of consumption that does not depend on income.

Average fixed cost (AFC) Fixed cost divided by the quantity produced.

Average variable cost (AVC) Variable cost divided by the quantity produced.

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B

Balance of payments deficit Under a fixed exchange rate system, a situation in which the supply of a country’s currency exceeds the demand for the currency at the current exchange rate.

Balance of payments surplus Under a fixed exchange rate system, a situation in which the demand of a country’s currency exceeds the supply for the currency at the current exchange rate.

Balance sheet An account statement for a bank that shows the sources of its funds (liabilities) as well as the uses of its funds (assets).

Bank run Panicky investors simultaneously trying to withdraw their funds from a bank they believe may fail.

Barrier to entry Something that prevents firms from entering a profitable market.

Barter The exchange of one good or service for another.

Board of Governors of the Federal Reserve The seven-person governing body of the Federal Reserve System in Washington,D.C.

Break-even price The price at which economic profit is zero; price equals average total cost.

Budget deficit The amount by which government spending exceeds revenues in a given year

Budget surplus The amount by which government revenues exceed government expenditures in a given year.

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C

Capital deepening Increases in the stock of capital per worker.

Cartel A group of firms that act in unison, coordinating their pricee and quantity decisions.

Central bank A banker’s bank: an official bank that controls the supply of money in a country.

Ceteris paribus The Latin expression meaning other variables being held fixed.

Chain-weighted index A method for calculating changes in prices that uses an average of base years from neighboring years.

Change in demand A shift of the demand curve caused by a change in a variable other than the price of the product.

Change in quantity demanded A change in the quantity consumers are willing and able to buy when the price changes; represented graphically by movement along the demand curve.

Change in quantity supplied A change in the quantity firms are willing and able to sell when the price changes; represented graphically by movement along the supply curve.

Change in supply A shift of the supply curve caused by a change in a variable other than the price of the product.

Commodity money A monetary system in which the actual money is a commodity, such as gold or silver.

Comparative advantage The ability of one person or nation to produce a good at a lower opportunity cost than another person or nation.

Complements Two goods for which a decrease in the price of one good increases the demand for the other good.

Concentration ratio The percentage of the market output produced by the largest firms.

Constant returns to scale A situation in which the long-run total cost increases proportionately with output, so average cost is constant.

Constant-cost industry An industry in which the average cost of production is constant; the long-run supply curve is horizontal.

Consumer Price Index A price index that measures the cost of a fixed basket of goods chosen to represent the consumption pattern of a typical consumer.

Consumption expenditures Purchases of newly produced goods and services by households.

Consumption function The relationship between the level of income and consumer spending.

Contestable market A market with low entry and exit costs.

Contractionary policies Government policy actions that lead to decreases in aggregate demand.

Convergence The process by which poorer countries close the gap with richer countries in terms of real GDP per capita.

Cost-of-living adjustments (COLAs) Automatic increases in wages or other payments that are tied to the CPI.

Creative destruction The view that a firm will try to come up with new products and more efficient ways to produce products to earn monopoly profits.

Cross-price elasticity of demand A measure of the responsiveness of demand to changes in the price of a another good; equal to the percentage change in the quantity demanded of one good (X) divided by the percentage change in the price of another good (Y).

Cyclical unemployment Unemployment that occurs during fluctuations in real GDP.

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D

Deflation Negative inflation or falling prices of goods and services.

Demand schedule A table that shows the relationship between the price of a product and the quantity demanded, ceteris paribus.

Depreciation of a currency A decrease in the value of a currency relative to the currency of another nation.

Depreciation Reduction in the value of capital goods over a oneyear period due to physical wear and tear and also to obsolescence; also called capital consumption allowance.

Depression The common name for a severe recession.

Devaluation A decrease in the exchange rate to which a currency is pegged under a fixed exchange rate system.

Diminishing returns As one input increases while the other inputs are held fixed, output increases at a decreasing rate.

Discount rate The interest rate at which banks can borrow from the Fed.

Discouraged workers Workers who left the labor force because they could not find jobs.

Discretionary spending The spending programs that Congress authorizes on an annual basis.

Diseconomies of scale A situation in which the long-run average cost of production increases as ouput increases.

Dominant strategy An action that is the best choice for a player, no matter what the other player does.

Double coincidence of wants The problem in a system of barter that one person may not have what the other desires.

Duopolists’ dilemma A situation in which both firms in a market would be better off if both chose the high price, but each chooses the low price.

Duopoly A market with two firms.

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E

Economic cost The opportunity cost of the inputs used in the production process; equal to explicit cost plus implicit cost.

Economic growth Sustained increases in the real GDP of an economy over a long period of time.

Economic model A simplified representation of an economic environment, often employing a graph.

Economic profit Total revenue minus economic cost.

Economics The study of choices when there is scarcity.

Economies of scale A situation in which the long-run average cost of production decreases as output increases.

Elastic demand The price elasticity of demand is greater than one.

Entitlement and mandatory spending Spending that Congress has authorized by prior law, primarily providing support for individuals.

Entrepreneurship The effort used to coordinate the factors of production—natural resources, labor, physical capital, and human capital—to produce and sell products.

Euro The common currency in Europe.

Excess demand (shortage) A situation in which, at the prevailing price, the quantity demanded exceeds the quantity supplied.

Excess reserves Any additional reserves that a bank holds above required reserves.

Excess supply (surplus) A situation in which at the prevailing price the quantity supplied exceeds the quantity demanded.

Exchange rate The price at which currencies trade for one another in the market.

Expansion The period after a trough in the business cycle during which the economy recovers.

Expansionary policies Government policy actions that lead to increases in aggregate demand.

Explicit cost The actual monetary payment for inputs.

Export A good produced in the home country (for example, the United States) and sold in another country.

External benefit A benefit from a good experienced by someone other than the person who buys the good.

External cost of production A cost incurred by someone other than the producer.

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F

Factors of production The resources used to produce goods and services; also known as production inputs.

Federal funds market The market in which banks borrow and lend reserves to and from one another.

Federal funds rate The interest rate on reserves that banks lend each other.

Federal Open Market Committee (FOMC) The group that decides on monetary policy: It consists of the seven members of the Board of Governors plus five of 12 regional bank presidents on a rotating basis.

Federal Reserve Bank One of 12 regional banks that are an official part of the Federal Reserve System.

Fiat money A monetary system in which money has no intrinsic value but is backed by the government.

Firm-specific demand curve A curve showing the relationship between the price charged by a specific firm and the quantity the firm can sell.

Fiscal policy Changes in government taxes and spending that affect the level of GDP.

Fixed cost (FC) Cost that does not vary with the quantity produced.

Fixed exchange rate system A system in which governments peg exchange rates to prevent their currencies from fluctuating.

Flexible exchange rate system A currency system in which exchange rates are determined by free markets.

Foreign exchange market intervention The purchase or sale of currencies by government to influence the market exchange rate.

Free rider A person who gets the benefit from a good but does not pay for it.

Frictional unemployment Unemployment that occurs with the normal workings of the economy, such as workers taking time to search for suitable jobs and firms taking time to search for qualified employees.

Full employment The level of unemployment that occurs when the unemployment rate is at the natural rate.

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G

Game theory The study of decision making in strategic situations.

Game tree A graphical representation of the consequences of different actions in a strategic setting.

GDP deflator An index that measures how the prices of goods and services included in GDP change over time.

General Agreement on Tariffs and Trade (GATT) An international agreement established in 1947 that has lowered trade barriers between the United States and other nations.

Gold standard A monetary system in which gold backs up paper money.

Government purchases Purchases of newly produced goods and services by local, state, and federal governments.

Grim-trigger strategy A strategy where a firm responds to underpricing by choosing a price so low that each firm makes zero economic profit.

Gross domestic product (GDP) The total market value of final goods and services produced within an economy in a given year.

Gross investment Total new investment expenditures.

Gross national product GDP plus net income earned abroad.

Growth accounting A method to determine the contribution to economic growth from increased capital, labor, and technological progress.

Growth rate The percentage rate of change of a variable from one period to another.

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H

Human capital The knowledge and skills acquired by a worker through education and experience and used to produce goods and services.

Hyperinflation An inflation rate exceeding 50 percent per month.

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I

Illiquid Not easily transferable to money.

Implicit cost The opportunity cost of inputs that do not require a monetary payment.

Import licenses Rights, issued by a government, to import goods.

Import quota A government-imposed limit on the quantity of a good that can be imported.

Import A good produced in a foreign country and purchased by residents of the home country (for example, the United States).

Income effect for leisure demand The change in leisure time resulting from a change in real income caused by a change in the wage.

Income elasticity of demand A measure of the responsiveness of demand to changes in consumer income; equal to the percentage change in the quantity demanded divided by the percentage change in income.

Increasing-cost industry An industry in which the average cost of production increases as the total output of the industry increases; the long-run supply curve is positively sloped.

Individual demand curve A curve that shows the relationship between the price of a good and quantity demanded by an individual consumer, ceteris paribus.

Individual supply curve A curve showing the relationship between price and quantity supplied by a single firm, ceteris paribus.

Indivisible input An input that cannot be scaled down to produce a smaller quantity of output.

Inelastic demand The price elasticity of demand is less than one.

Inferior good A good for which an increase in income decreases demand.

Inflation rate The percentage rate of change in the price level.

Inflation Sustained increases in the average prices of all goods and services.

Input-substitution effect The change in the quantity of labor demanded resulting from an increase in the price of labor relative to the price of other inputs.

Inside lags The time it takes to formulate a policy.

Intermediate goods Goods used in the production process that are not final goods and services.

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J

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K

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L

Labor force participation rate The percentage of the population over 16 years of age that is in the labor force.

Labor force The total number of workers, both the employed and the unemployed.

Labor productivity Output produced per hour of work.

Labor Human effort, including both physical and mental effort, used to produce goods and services.

Laffer curve A relationship between the tax rates and tax revenues that illustrates that high tax rates could lead to lower tax revenues if economic activity is severely discouraged.

Law of demand There is a negative relationship between price and quantity demanded, ceteris paribus.

Law of supply There is a positive relationship between price and quantity supplied, ceteris paribus.

Learning effect The increase in a person’s wage resulting from the learning of skills required for certain occupations.

Lender of last resort A central bank is the lender of last resort, the last place, all others having failed, from which banks in emergency situations can obtain loans.

Liabilities The sources of funds for a bank, including deposits and owners’ equity.

Limit pricing The strategy of reducing the price to deter entry.

Liquidity demand for money The demand for money that represents the needs and desires individuals and firms have to make transactions on short notice without incurring excessive costs.

Long-run aggregate supply curve A vertical aggregate supply curve that reflects the idea that in the long run, output is determined solely by the factors of production.

Long-run average cost (LAC) The long-run cost divided by the quantity produced.

Long-run demand curve for labor A curve showing the relationship between the wage and the quantity of labor demanded over the long run, when the number of firms in the market can change and firms can modify their production facilities.

Long-run marginal cost (LMC) The change in long-run cost resulting from a one-unit increase in output.

Long-run market supply curve A curve showing the relationship between the market price and quantity supplied in the long run.

Long-run neutrality of money An increase in the supply of money has no effect on real interest rates, investment, or output in the long run.

Long-run total cost (LTC) The total cost of production when a firm is perfectly flexible in choosing its inputs.

Low-price guarantee A promise to match a lower price of a competitor.

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M

M1 The sum of currency in the hands of the public, demand deposits, other checkable deposits, and travelers’ checks.

M2 M plus other assets, including deposits in savings and loans accounts and money market mutual funds.

Macroeconomics The study of the nation’s economy as a whole; focuses on the issues of inflation, unemployment, and economic growth.

Marginal benefit The additional benefit resulting from a small increase in some activity.

Marginal change A small, one-unit change in value.

Marginal cost The additional cost resulting from a small increase in some activity.

Marginal product of labor The change in output from one additional unit of labor.

Marginal propensity to consume (MPC) The fraction of additional income that is spent.

Marginal propensity to save (MPS) The fraction of additional income that is saved.

Marginal revenue The change in total revenue from selling one more unit of output.

Marginal utility The change in total utility from one additional unit of a good.

Marginal-revenue product of labor (MRP) The extra revenue generated from one additional unit of labor; MRP is equal to the price of output times the marginal product of labor.

Market demand curve A curve showing the relationship between price and quantity demanded by all consumers, ceteris paribus.

Market equilibrium A situation in which the quantity demanded equals the quantity supplied at the prevailing market price.

Market power The ability of a firm to affect the price of its product.

Market supply curve for labor A curve showing the relationship between the wage and the quantity of labor supplied.

Market supply curve A curve showing the relationship between the market price and quantity supplied by all firms, ceteris paribus.

Marketable pollution permits A system under which the government picks a target pollution level for a particular area, issues just enough pollution permits to meet the pollution target, and allows firms to buy and sell the permits; also known as a cap-and-trade system.

Means-tested program A government spending program that provides assistance to those whose income falls below a certain level.

Medicaid A federal and state government health program for the poor.

Medicare A federal government health program for the elderly.

Medium of exchange Any item that buyers give to sellers when they purchase goods and services.

Menu costs The costs associated with changing prices and printing new price lists when there is inflation.

Merger A process in which two or more firms combine their operations.

Microeconomics The study of the choices made by households, firms, and government and how these choices affect the markets for goods and services.

Minimum efficient scale The output at which scale economies are exhausted.

Minimum supply price The lowest price at which a product will be supplied.

Mixed market A market in which goods of different qualities are sold for the same price.

Monetary policy The range of actions taken by the FederalReserve to influence the level of GDP or inflation.

Money market The market for money in which the amount supplied and the amount demanded meet to determine the nominal interest rate.

Money multiplier The ratio of the increase in total checking account deposits to an initial cash deposit.

Money Any items that are regularly used in economic transactions or exchanges and accepted by buyers and sellers.

Monopolistic competition A market served by many firms that sell slightly different products.

Monopoly A market in which a single firm sells a product that does not have any close substitutes.

Moral hazard A situation in which one side of aneconomic relationship takes undesirable or costly actions that the other side of the relationship cannot observe.

Multiplier The ratio of the total shift in aggregate demand to the initial shift in aggregate demand.

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N

Nash equilibrium An outcome of a game in which each player is doing the best he or she can, given the action of the other players.

National income The total income earned by a nation’s residents both domestically and abroad in the production of goods and services.

Natural monopoly A market in which the economies of scale in production are so large that only a single large firm can earn a profit.

Natural rate of unemployment The level of unemployment at which there is no cyclical unemployment. It consists of only frictional and structural unemployment.

Natural resources Resources provided by nature and used to produce goods and services.

Negative relationship A relationship in which two variables move in opposite directions.

Net exports Exports minus imports.

Net investment Gross investment minus depreciation.

Network externalities The value of a product to a consumer increases with the number of other consumers who use it.

New growth theory Modern theories of growth that try to explain the origins of technological progress.

Nominal GDP The value of GDP in current dollars.

Nominal value The face value of an amount of money.

Normal good A good for which an increase in income increases demand.

Normative analysis Answers the question “What ought to be?

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O

Open market operations The purchase or sale of U.S. government securities by the Fed.

Open market purchases The Fed’s purchase of government bonds from the private sector.

Open market sales The Fed’s sale of government bonds to the private sector.

Opportunity cost What you sacrifice to get something.

Output effect The change in the quantity of labor demanded resulting from a change in the quantity of output produced.

Outside lags The time it takes for the policy to actually work.

Owners’ equity The funds provided to a bank by its owners.

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P

Patent The exclusive right to sell a new good for some period of time.

Peak The date at which a recession starts.

Perfectly competitive market A market with many sellers and buyers of a homogeneous product and no barriers to entry.

Perfectly elastic demand The price elasticity of demand is infinite.

Perfectly elastic supply The price elasticity of supply is equal to infinity.

Perfectly inelastic demand The price elasticity of demand is zero.

Perfectly inelastic supply The price elasticity of supply equals zero.

Permanent income An estimate of a household’s long-run average level of income.

Personal disposable income Personal income that households retain after paying taxes.

Personal income Income, including transfer payments, received by households.

Physical capital The stock of equipment, machines, structures, and infrastructure that is used to produce goods and services.

Pollution tax A tax or charge equal to the external cost per unit of pollution.

Positive analysis Answers the question “What is?” or “What will be?”

Positive relationship A relationship in which two variables move in the same direction.

Predatory pricing A pricing scheme under which a firm decreases the price to drive rival firms out of business and increases the price when rival firms leave the market.

Price discrimination The practice of selling a good at different prices to different consumers.

Price elasticity of demand (Ed) A measure of the responsiveness of the quantity demanded to changes in price; equal to the absolute value of the percentage change in quantity demanded divided by the percentage change in price.

Price elasticity of supply A measure of the responsiveness of the quantity supplied to changes in price; equal to the percentage change in quantity supplied divided by the percentage change in price.

Price taker A buyer or seller that takes the market price as given.

Price-fixing An arrangement in which firms conspire to fix prices.

Private cost of production The production cost borne by a producer, which typically includes the costs of labor, capital, and materials.

Private good A good that is consumed by a single person or household; a good that is rival in consumption and excludable.

Private investment expenditures Purchases of newly produced goods and services by firms.

Product differentiation The process used by firms to distinguish their products from the products of competing firms.

Production possibilities curve A curve that shows the possible combinations of products that an economy can produce, given that its productive resources are fully employed and efficiently used.

Public good A good that is available for everyone to consume, regardless of who pays and who doesn’t; a good that is nonrival in consumption and nonexcludable.

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Q

Quantity demanded The amount of a product that consumers are willing and able to buy.

Quantity supplied The amount of a product that firms are willing and able to sell.

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R

Real GDP per capita Gross domestic product per person adjusted for changes in constant prices. It is the usual measure of living standards across time and between countries.

Real GDP A measure of GDP that controls for changes in prices.

Real value The value of an amount of money in terms of what it can buy.

Recession Commonly defined as six consecutive months of declining real GDP.

Rent seeking The process of using public policy to gain economic profit.

Required reserves The specific fraction of their deposits that banks are required by law to hold as reserves.

Reserve ratio The ratio of reserves to deposits.

Reserves The portion of banks’ deposits set aside in either vault cash or as deposits at the Federal Reserve.

Revaluation An increase in the exchange rate to which a currency is pegged under a fixed exchange rate system.

Rule of 70 A rule of thumb that says output will double in /x years, where x is the percentage rate of growth.

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S

Saving Income that is not consumed

Scarcity The resources we use to produce goods and services are limited.

Seasonal unemployment The component of unemployment attributed to seasonal factors.

Shoe-leather costs Costs of inflation that arise from trying to reduce holdings of cash.

Short run in macroeconomics The period of time in which prices do not change or do not change very much.

Short-run aggregate supply curve A relatively flat aggregate supply curve that represents the idea that prices do not change very much in the short run and that firms adjust production to meet demand.

Short-run average total cost (ATC) Short-run total cost divided by the quantity of output; equal to AFC plus AVC.

Short-run demand curve for labor A curve showing the relationship between the wage and the quantity of labor demanded over the short run, when the firm cannot change its production facility.

Short-run marginal cost (MC) The change in short-run total cost resulting from a one-unit increase in output.

Short-run market supply curve A curve showing the relationship between market price and the quantity supplied in the short run.

Short-run supply curve A curve showing the relationship between the market price of a product and the quantity of output supplied by a firm in the short run.

Short-run total cost (TC) The total cost of production when at least one input is fixed; equal to fixed cost plus variable cost.

Shut-down price The price at which the firm is indifferent between operating and shutting down; equal to the minimum average variable cost.

Signaling effect The information about a person’s work skills conveyed by completing college.

Slope of a curve The vertical difference between two points (the rise) divided by the horizontal difference (the run).

Social cost of production Private cost plus external cost.

Social Security A federal government program to provide retirement support and a host of other benefits.

Speculative demand for money The demand for money that arises because holding money over short periods is less risky than holding stocks or bonds.

Stabilization policies Policy actions taken to move the economy closer to full employment or potential output.

Stagflation A decrease in real output with increasing prices.

Store of value The property of money that it preserves value until it is used in an exchange.

Structural unemployment Unemployment that occurs when there is a mismatch of skills and jobs.

Substitutes Two goods for which an increase in the price of one good increases the demand for the other good.

Substitution effect for leisure demand The change in leisure time resulting from a change in the wage (the price of leisure) relative to the price of other goods.

Sunk cost A cost that a firm has already paid or committed to pay, so it cannot be recovered.

Supply schedule A table that shows the relationship between the price of a product and quantity supplied, ceteris paribus.

Supply shocks External events that shift the aggregate supply curve.

Supply-side economics A school of thought that emphasizes the role that taxes play in the supply of output in the economy.

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T

Tariff A tax on imported goods.

Technological progress More efficent ways of organizing economic affairs that allow an economy to increase output without increasing inputs.

Thin market A market in which some high-quality goods are sold but fewer than would be sold in a market with perfect information.

Tie-in sales A business practice under which a business requires a consumer of one product to purchase another product.

Tit-for-tat A strategy where one firm chooses whatever price the other firm chose in the preceding period.

Total revenue The money a firm generates from selling its product.

Total-product curve A curve showing the relationship between the quantity of labor and the quantity of output produced, ceteris paribus.

Trade deficit The excess of imports over exports.

Trade surplus The excess of exports over imports.

Transaction demand for money The demand for money based on the desire to facilitate transactions.

Transfer payments Payments from governments to individuals that do not correspond to the production of goods and services.

Trough The date at which output stops falling in a recession.

Trust An arrangement under which the owners of several companies transfer their decision-making powers to a small group of trustees.

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U

Unanticipated inflation Inflation that is not expected.

Unemployment insurance Payments unemployed people receive from the government.

Unemployment rate The percentage of the labor force that is unemployed.

Unit elastic demand The price elasticity of demand is one.

Unit of account A standard unit in which prices can be stated and the value of goods and services can be compared.

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V

Value added The sum of all the income—wages, interest, profits, and rent—generated by an organization. For a firm, we can measure value added by the dollar value of the firm’s sales minus the dollar value of the goods and services purchased from other firms.

Variable cost (VC) Cost that varies with the quantity produced.

Variable A measure of something that can take on different values.

Voluntary export restraint (VER) A scheme under which an exporting country voluntarily decreases its exports.

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W

Wealth effect The increase in spending that occurs because the real value of money increases when the price level falls.

World Trade Organization (WTO) An organization established in 1995 that oversees GATT and other international trade agreements, resolves trade disputes, and holds forums for further rounds of trade negotiations.

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X

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Y

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Z

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