Comparative Advantage

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Comparative Advantage is the concept where one person, business, or economy is able to outproduce one particular product or service compared to another person, business, or economy. The concept of comparative advantage is essential to understanding both why people choose different careers, and why countries engage in international trade. Comparative Advantage At The Personal Level When it comes to people, comparative advantage will have a … Continue reading Comparative Advantage »

Gross Domestic Product

In Economics, “Gross Domestic Product” is the one statistic to rule them all – a measure of the total size of an economy. Definition The “Gross Domestic Product” of a country is the total value of all finished goods and services that were produced in a given year. In other words, this is the total economic output. GDP is used to measure the total size … Continue reading Gross Domestic Product »

Property Rights

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Property rights is the foundation of all free-enterprise economic systems. It is what allows people to profit from capital and ideas, without fear of seizure by the government or theft. Definition “Property Rights” usually refers to a set of fundamental rights giving citizens control over their own land, capital, and ideas. Land Property Rights The property right to Land gives a landowner exclusive use of … Continue reading Property Rights »

International Trade

International Trade is the system under which businesses, individuals, and governments trade goods and services. This exchange from many different National economies is what makes up the Global economy. Imports and Exports When we talk about international trade, we usually think in terms of imports (the goods and services a country buys from outside) and exports (the goods and services one country sells to the … Continue reading International Trade »

Inflation

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Inflation: how much less a dollar is worth next year compared to today. Most consumers hate inflation – it erodes your savings, and eats away at the real benefits you get from increasing income. However, inflation plays a necessary role in the economy, and without it much of the economy would quickly fall apart. Inflation Definition “Inflation” means that the general prices of goods and … Continue reading Inflation »

Government Impact on the Economy

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As a society with a market-based economy, the government has three broad mandates: Ensure the common defense Promote economic growth Strive to maintain a just society On the face, only one of these implies direct intervention in the economy, but all three are interconnected with the economy as a whole. This means every action taken by the government will have some impact on the economy, … Continue reading Government Impact on the Economy »

Fiscal Policy

Government spending makes up a whopping 20% of all spending in the American economy, including the salaries of all government employees, government contracts to private companies, and military spending. This is all paid for by taxes, meaning more than 1/3 of all economic activity filters through the public sector in some way. This means government taxing and spending will have a huge impact on the … Continue reading Fiscal Policy »

Time Value of Money

The “Time Value of Money” is one of the most important concepts in economics, investing, and business. For individuals, this determines how much you save and spend. For businesses, it determines how quickly they try to expand. For investors, it decides the mix of a portfolio. What is the Time Value of Money? “Time is money” – this can be more literal than you think. … Continue reading Time Value of Money »

Labor and Wages

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What is “Labor”? “Labor” is how much a person works. It is the use of time and exertion of effort to produce something of value. Generally speaking, the more valuable a person’s labor is, the higher their wage. Skilled And Unskilled Labor Each person starts off as an Unskilled Worker, meaning they do not have any specific training or professional skill sets that set them … Continue reading Labor and Wages »

Unemployment

“Unemployment” is a major economic indicator measuring how much of the working population is currently looking for a job. The unemployment rate is the most “tangible” economic indicator – if GDP is going up or down, it is harder for people to notice in their day-to-day lives. When the unemployment rate goes up, it usually means you or someone you know lost their job recently, … Continue reading Unemployment »

Price Controls

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Definition “Price Controls” are artificial limits that are put on prices. If the limit is put in place to prevent prices from getting too high, they are called Ceilings. If they are in place to prevent the price from getting too low, they are called “Floors”. Price Ceilings Price Ceilings are controls put in place to prevent the price of some good or service from … Continue reading Price Controls »

Interest Rates

Percentage and Time

What Are Interest Rates? Interest rates are growth rates – it is a percentage that is used to calculate how much a loan or investment grows over time. Interest rates are most commonly associated with borrowing money, like a homeowner taking out a mortgage or a government selling a bond. The interest rate is how much extra needs to be paid back in exchange for … Continue reading Interest Rates »

Scarcity

Definition Scarcity refers to the fact that resources are finite – people and organizations need to allocate their finite resources between their infinite wants. Each year, the world produces more goods and services, along with better technologies and processes that can increase output farther. Even with this growth, there will always be scarcity, because there will always be the question of the best way to … Continue reading Scarcity »

Specialization

Alice, Bob, Carol, and Dan

Definition “Specialization” is when a labor force begins to divide total production, leading to a rise of experts or specialists. This is called the Division of Labor, and it typically results in much higher productivity of labor. How Does It Work? Specialization has two main parts – Division of Labor, and a rise of Experts. Division of Labor Imagine there is a company that builds cars. … Continue reading Specialization »

Opportunity Cost

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Definition “Opportunity Cost” is what needs to be given up to get something. This is different from an item’s price. Imagine you want to buy some stock for your virtual portfolio – you can afford one share of either Apple () or Alphabet, Inc. (). Your Opportunity Cost of buying one is that you cannot also buy the other, meaning you’ll miss out on any potential … Continue reading Opportunity Cost »

Marginal Benefit and Marginal Cost

Profit maximization point

Everyone knows about costs and benefits of doing something – the pros and cons of making a choice. Marginal benefit and marginal cost are different – they look more closely at doing slightly more or less of different alternatives. Marginal costs and benefits are extremely important to producers when choosing their inputs and prices. What Does “Marginal” Mean? When we use the term “Marginal”, it … Continue reading Marginal Benefit and Marginal Cost »

Benefits Of Competition

What is Competition? “Competition” is when many producers try to sell similar goods to the same set of consumers. The producers need to “compete” to try to attract more consumers, usually by lowering prices, offering better versions of the goods or services, or through marketing. Competition is the core concept of the Market Economy. Why Does Competition Work? Competition generally leads to lower prices, more … Continue reading Benefits Of Competition »

The Business Cycle

GDP growth

What Is The Business Cycle? The Business Cycle is the broad, over-stretching cycle of expansion and recession in an economy. The Business Cycle is concerned with many things – unemployment, industrial expansion, inflation rates, but the most important indicator is GDP (Gross Domestic Product) growth. Below you can see a graph of the GDP growth rate in the United States since 1946 – the grey … Continue reading The Business Cycle »

Entrepreneurship – Building Long Term Growth

What does it mean to be an Entrepreneur? An Entrepreneur is someone who takes a risk to start a new business. Nearly every business that exists (apart those created as spin-offs of other businesses, or by government intervention) was started by one or several entrepreneurs, who took a risk to launch a new company. Who becomes an Entrepreneur? Starting and running a small business is not … Continue reading Entrepreneurship – Building Long Term Growth »

Incentives

Definition Economic Incentives includes anything that pushes people, businesses, and governments to do one thing or another. This includes what products you buy, what career you choose, what products businesses produce, and what government programs are put in place. Incentives for Individuals Each individual faces many economic incentives every day. If you are in school, you have strong incentives to graduate – graduates (on average) … Continue reading Incentives »

Externalities

Pollution

Definition In Economics, an “Externality” is a benefit or cost that is not reflected in the price of a good or service. Why do Externalities Exist? Prices are determined by the relationship between the supply and demand of a good or service (for details, see our article on Supply and Demand Examples in the Stock Market). This, in turn, is determined by individual producers and … Continue reading Externalities »

Economic Growth

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What is Economic Growth? Economic Growth means that the economy is growing – more goods and services are being produced and consumed than they were before. The most common measurement of economic growth is the Gross Domestic Product (or GDP), which measures the total number of finished goods and services produced in an economy in a year. Why is Economic Growth important? Economic growth means … Continue reading Economic Growth »

What is Economics?

Definition “Economics” is often called the Dismal Science – it studies the trade-offs between making choices. The purpose of economics is to look at the different incentives, assets, and choices facing people, businesses, schools, and governments, and see if there is any way to improve outcomes. This is done by looking at how supply and demand are related throughout the economy, exploring different allocation methods, … Continue reading What is Economics? »

Types of Companies

Have you ever wanted to start a business? Maybe you want to know the difference between a lemonade stand and Minute-Maid, besides just the size of the companies. Different types of companies have different levels of liability (meaning level of responsibility) for the owner or owners. What this means is that the more liability an owner has, the more that owner is responsible for the company’s debts. … Continue reading Types of Companies »

Major Economic Indicators

Definition “Major Economic Indicators” are numbers that you can look at to try to get a picture of how well the economy is doing. Different indicators measure different parts of the economy, but their main characteristic is that they measure the same thing in the same way over time. This means that you can compare the indicators from one month, quarter, or year to each other … Continue reading Major Economic Indicators »

Supply and Demand Examples in the Stock Market

The stock market determines prices by constantly-shifting movements in the supply and demand for stocks. The price and quantity where supply are equal is called “Market Equilibrium”, and one major role of stock exchanges is to help facilitate this balance. We can use the stock market to give some great supply and demand examples with buyers and sellers who want different prices. Supply of Stock … Continue reading Supply and Demand Examples in the Stock Market »

Comparative Economic Systems

Comparing Economic Systems There are many different economic systems that try to result in more equality or faster growth. The structure of a country’s economy has a lot to do with the country’s politics and the values of its population. However, the economy of every country also changes over time, and how it falls between these broad categories will often change with it. Market Economies … Continue reading Comparative Economic Systems »

Federal Reserve

Definition The Federal Reserve Bank, or the “Fed”, is the central banking system of the United States. It serves as the primary regulator of the US dollar, as well as the “lender of last resort” for other banks. Regulating Currency The Federal Reserve works to maintain the interest rates that banks use to lend money to each other – and by extension – the interest rate … Continue reading Federal Reserve »

Monopoly

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Monopoly, in economic terms, is used to refer to a specific company or individual has a large enough control of a particular product or service that allows them to influence it’s price or certain characteristics.

Elasticity

Elasticity is one of the most important terms in economics, and has a plethora of uses. Economists define elasticity as the ratio of the percent change in one variable to the percent change in another valuable.

Hyperinflation

Hyperinflation refers to out of control or extremely rapid inflation, where prices increase so quickly that the concept of real inflation becomes meaningless.

National Debt

The total amount that the federal government has borrowed including internal debt (borrowed from national creditors) and external debt (borrowed from foreign creditors).