Economic Terms

Started With E
 A. Econometrics
Mathematics and sophisticated computing applied to economics.
Econometricians crunch data in search of economic relationships
that have statistical significance. Sometimes this is done to test a
theory; at other times the computers churn the numbers until they
come up with an interesting result. Some economists are fierce
critics of theory-free econometrics.
 B. Economic and Monetary Union
In January 1999, 11 of the 15 countries in the European union merged their
national currencies into a single European currency, the euro. This decision was
motivated partly by politics and partly by hoped-for economic benefits from the
creation of single, integrated European economy. The benefits included currency
stability and low inflation, underwritten by an independent European central bank.
Forming the single currency also involved big risks, however. Euro members gave
up both the right to set their own interest rates and the option of moving exchange
rates against each other. They also agreed to limit their budged deficits under a
stability and growth pact.
 C. Economic Indicator
• A statistic used for judging the health of an economy, the rate of
unemployment or the rate of inflation. Such statistic is often
subject to huge revisions in the months and years after they are
published, thus causing difficulties and embarrassment for the
economic policymakers who rely on them.
 D. Economic Man
• At the heart of economic theory is homo economicus, the economics model
of human behavior. In traditional classical economics and in the classical
economics it was assumed that people acted in their own interest. Adam
Smith argued that society was made better of by everybody pursuing their
selfish interests through the workings of the invisible. However, in recent
years, mainstream economists have tried to include a broader range of
human motivation in their models. There have been attempts to model
altruism and charity. Behavioral economics has drawn in psychological
insight into human behavior to explain economics phenomena.
 E. Economic Sanctions
• A way of punishing errant countries, which is currently more acceptable
than bombing of invading them. One or more restrictions are imposed on
international trade with the targeted country in order to persuade the target
government to change a policy. Possible sanctions include limiting export
and import trade with the target, constraining investment in the target, and
preventing transfers of money involving citizens or the government of the
target. Sanctions can be multilateral, with many countries acting together,
perhaps under the auspices of the united nations, or unilateral, when one
country takes action on its own.
 F. Economics
The “dismal science”, according the Thomas Carlyle, a 19th-century Scottish
writer. It has been described in many ways, few of them flattering. The most
concise, non abusive, definition is the study of how society uses its scarce
resources.
G. Economies of Scale
Bigger is better. In many industries, as output increases, the average cost of
each unit produced falls. One reason is that overheads and other fixed costs
can be spread over more units of output. However, getting bigger can also
increase average costs (diseconomies of scale) because it is more difficult to
manage a big operation, for instance.
 H. Efficiency
Getting the most of the resource used. For a particular sort of efficiency
other favored by economist, see pare to efficient.

I. Efficiency Wages
Wages that are set at above the market clearing rate so as to encourage.
Workers di increase their productivity.
J. Efficient Market Hypothesis
You can’t beat the market. The efficient market hypothesis says that the
price of a financial asset reflects all the information available and responds
only to unexpected news.
 K. Elasticity
• Price elasticity measure how much the quantity of supply of a good, or demand
for it, changes if its price changes.
• Income elasticity of demand measures how the quantity demanded changes when
income increase.
• Class-elasticity shows how the demand for one good, changes the price changes.
• Elasticity of substitution describes how easily how easily one input in the
production process, such as labour, can be substituted for another such as
machinery.

L. Endogenous
• Inside the economic model; the opposite of exogenous.
 M. Engel’s Law
People generally spend a smaller share of their budget on food as their
income rises. Ernst Engel, a Russian statistician, first made this observation
in 1857. The reason is that food is a necessity, which poor people have to
buy.
N. Enron

Until late 2001, Enron, an energy company turned financial powerhouse

based in Houston, Texas had been one of the most admired firms in the
United States and the world. It was praised for everything from pioneering
energy trading via the internet to its innovative corporate culture and its
system of employment evaluation by peer review, which resulted in those
that were not rated by their peers being fired.
 O. Enterprise

One of the factors of production, along with land, labour and capital. The
creative juices of capitalism; the animal spirits of the entrepreneur.

P. Entrepreneur
The life and soul of the capitalist party. Somebody who has the idea and
enterprise to mix together the other factors of production to produce
something valuable. And entrepreneur must be willing to take a RISK in
pursuit of profit.
 Q. Environmental Economics

The traditional measure of GDP incorporates only those thing that are paid
for, this may include things that reduce the overall quality of life, including
turning the environment. For instance, cleaning up an oil spill will increase
GDP if people are paid for the clean up. Attempts have been made to devise
an alternative environmentally friendly measure of national income but so
far progress has been limited. At the very least, traditional economists
increasingly that maximizing GDP growth does not necessarily equal
maximizing social welfare.
 R. Equilibrium

When supply and demand are in balance. At the equilibrium price, the
quantity that buyers are willing to buy exactly matches the quantity that
seller are willing to sell. So everybody is satisfied, unlike when there is
disequilibrium. In classical economics, it is assumed that markets always
tend towards equilibrium and return to it in the event that something causes
a temporary disequilibrium. General equilibrium is when supply and demand
are balanced simultaneously in all the markets in an economy.
 S. Equity
• The capital of a firm, after deducting any liabilities to outsiders other than
shareholders, who are typically the legal owners of the firms equity.
• Fairness. Dividing up the economic pie. Economists have been
particularly interested in this with regard to how systems of taxation work.
They have examined whether taxes treat fairly people with the same
ability to pay (horizontal equity) and people with different abilities to pay
(vertical q
 T. Equity Risk Premium

The extra reward investors get for buying a share over what they get for holding
a less risky asset, such as a government bond. Modern financial theory assumes
that the premium will be just big enough on average to compensate the investor
for the extra risk. However, studies have found that the average equity premium
over many years has been much larger than appears to be justified by the average
riskiness of shares.

U. Euro
The main currency of the European Union, launched in January 1999 and in
general circulation since 2002 (see economic and monetary union).
 V. Euro Zone
The economy comprising all the countries that have adopted the Euro. There
is much debate among economists about whether the euro zone is in fact and
optimal currency area.

W. Eurodollar
A deposit in dollar held in a bank outside the united states. Such deposits are
often set up to avoid taxes and currency exchange costs. They are frequently
lent out and have become an important method of credit creation.
 X. European Central Bank

The central bank of the European Union, responsible since January 1999 for
setting the official short-term interest rate in countries using the euro as their
domestic currency. In this role, the European Central Bank (ECB) replaced
national central banks such as Germany’s Bundesbank, which became local
branches of the ECB.
 Y. European Union
A club of European countries. Initially a six-country trade area established
by the 1957. treaty of Rome and known as the European Economic
Community, it has become an increasingly political union. In 1999 a single
currency, the euro, was launched in 11 of then 15 member countries. Viewed
as a single entity, the EU has a bigger economy than the United States. In
2002, a further 10 countries were invited to join the EU in 2004, increasing
its membership to 25 countries, with more countries likely to follow later.
 Z. Evolutionary Economics

A Darwinian approach to economics, sometimes called institutional

economics. Following the tradition of Schumpeter, it views the economy as
an evolving system and places a strong emphasis on dynamics, changing
structure (including technologies, institutions, beliefs and behaviour ) and
disequilibrium processes (such as innovation, selection and imitation).
 AA. Excess Returns
Getting more money from an economic investment than you needed to
justify investing. In perfect competition, the factors of production earn only
normal returns, that is the minimum amount of wages, profit, interest or rent
needed to secure their uses in the economic activity in question, rather than
in an alternative. Excess returns can only be earned for more than a short
period when there is marked failure.
 BB. Exchange Controls
Limit on the amount of foreign currency that can be taken info a country, or of
domestic currency that can be taken abroad.

CC. Exchange Rate

The price at which one currency can be converted into another. Over the year,
economists an politicians have often changed their minds about whether it is a
good idea to try to hold country’s exchange rate steady, rather than let it be
decided by marked forces. During the following two decades, the number of
currencies allowed to float increased, although in the late 1990s a number of
European currencies were permanently fixed under economics an monetary union
and some other countries established a currency board.
 DD. Exogenous
Outside the model. For instance, in traditional neo-classical ecomoics, model
of growth rely on an exogenous factor. To keep growing, an economy needs
continual infusions of technological progress. Yet this is a force that the
new-classical model makes no attempt to explain. The rate of technological
progress comes from outside the model it is simply assumed by the
economic modelers. In other words, it is exogenous.
 EE. Expectations
What people assume about the future, especially when they make decisions.
Economist debate whether people have irrational or rational expectations, or
adaptive expectations that change to reflect learning from past mistakes.

FF. Expected Returns

The capital gain plus income that investor think they will earn by making an
investment, at the time they invest.
 GG. Expenditure Tax
• A tax on what people spend, rather than what they earn or their wealth.
Economist often regard it as more efficient than other taxes because it
may discourage productive economic activity less; it is not the creating of
income and wealth that is taxed, but the spending of it. It can be a form of
indirect taxation, added to the price of a good or service when it is sold,
or direct taxation, levied on people’s income minus their saving over a
year.