Category: Glossary

Definition A company’s total revenue minus its total explicit costs. Example Assume a carpenter produces 1’000 chairs, which he then sells at a price of $100 each. His total revenue will add up to $100’000. If he faces total costs of $60’000, accounting profit will amount to $40’000 ($100’000 – […]

Definition A situation where asymmetric information (between buyers and sellers) causes unwanted results, because the unobserved attributes lead to an undesirable selection from the perspective of the uninformed party. Example A good example of adverse selection is the market for health insurance. In this market, the buyers know more about […]

Definition Often irregular and mostly unpredictable fluctuations (i.e. expansions or recessions) in economic activity experienced in an economy over a certain period of time.  Example As the economy expands, unemployment decreases while income and as spending increase. Once the expansion reaches its maximum, productivity starts to decline which results in higher […]

Definition The positive effects on unrelated third parties that originate during the consumption of a good or service. Example A possible example could be your neighbor’s flower garden. She most likely cultivates the plants solely for her own pleasure, yet everybody can enjoy the beauty of the flowers whenever they […]

Definition The negative effects on unrelated third parties that originate during the consumption a good or service. Example An example of a negative consumption externality could be your neighbor who likes to play loud music in the middle of the night and thereby prevents you from sleeping. He will not take […]

Definition The increase in the amount of goods and services that are produced in an economy over a certain period of time. Economic growth can be measured in nominal or real terms using the respective GDP (Gross Domestic Product). Nominal GDP accounts for the effects of inflation, whereas they are […]

Definition Costs that are constant irrespective of the quantity of output produced. Fixed costs have to be paid even if production is zero. Example The monthly rent an ice cream seller needs to pay for his store is a fixed cost (at least in the short run). The rent has […]

Definition The monetary value of all final goods and services produced within a country over a certain period of time (most commonly a year). Example Assume a country produces 5 cars (market price per unit: 2000$) and 4 motorcycles (market price per unit: 1000$). To keep things simple, there is […]

Definition The rate at which the overall price level in an economy increases. Inflation causes a decrease in the purchasing power of money. Example Suppose the annual inflation rate of an economy is 5%. That means, on average a product (e.g. a shirt) that costs 10 $ this year, will […]

Definition A graphic representation of the initial increase in a country’s trade deficit after a deprecation of its currency.  Example A deprecation of the local currency will temporarily result in a higher import volume than export volume. However, since (relatively speaking) the local goods and services become cheaper for other […]