88 Important Economics Keywords to know for any exam!

Economics is a lot about some important keywords. So why not try and understand each of them with an example?

Here, we have compiled a set of 88 important keywords, which would help you understand the basics of the Economy.

1. Appreciation – An increase in the value of a currency or asset. For example, if a currency appreciates, it means that it has increased in value compared to another currency.
2. Arbitrage – The practice of taking advantage of price differences in different markets to make a profit. For example, an investor may buy a stock in one market where it is underpriced and sell it in another market where it is overpriced, making a profit from the price difference.
3. Assets – Anything of value that a person or company owns. Examples of assets include real estate, stocks, bonds, and commodities.
4. Balance of payments – The balance of payments is a record of all transactions between a country and the rest of the world over a certain period of time. It includes exports, imports, and capital flows. A country that has a positive balance of payments is said to have a trade surplus, while a country with a negative balance of payments is said to have a trade deficit. Example: If a country exports $100 million worth of goods to other countries and imports $80 million worth of goods, the country’s balance of payments is $20 million.
5. Bankruptcy – Bankruptcy is a legal process that helps individuals and companies who are unable to pay their debts. The process involves a court-appointed trustee who takes control of the assets of the bankrupt individual or company and uses the proceeds to pay off creditors. Example: A company that is unable to meet its financial obligations and has no hope of improving its financial situation can declare bankruptcy. The company’s assets will be sold and the proceeds will be used to pay off its creditors.
6. Barter – Barter is a system of trade in which goods or services are exchanged for other goods or services without the use of money. It is a form of direct exchange and is typically used in situations where money is not available or is in short supply. Example: If a farmer has an excess of apples and a baker has an excess of bread, they can engage in barter by exchanging apples for bread. The farmer receives bread without having to use money, and the baker receives apples without having to use money.
7. Bonds – A bond is a type of financial instrument that represents a loan made by an investor to an issuer, such as a corporation or government. The issuer promises to pay periodic interest payments to the bondholder and to repay the principal amount when the bond matures. Bonds are considered to be relatively low-risk investments but also offer lower returns compared to stocks.
   • Example: An individual buys a bond from a corporation for $1,000 with an interest rate of 5% per year. The corporation pays the bondholder $50 in interest each year for the next ten years, at which point the bond matures and the corporation repays the original $1,000 investment. The bondholder earns a total of $500 in interest over the ten-year period, as well as the return of the original investment.
8. Bubble – A situation where the price of an asset rises significantly and then suddenly drops, often due to speculation. For example, the housing bubble in the United States in the early 2000s was characterized by a rapid increase in home prices followed by a sharp decline.
9. Budget – A plan for managing income and expenses over a certain period of time, typically a year.
10. Business cycle – The natural fluctuation of the economy over time, including periods of growth and recession. For example, during an expansionary phase of the business cycle, economic growth is strong, employment is high, and inflation is rising.
11. Buyer’s market – A market where there is an excess of supply over demand, leading to lower prices for buyers. For example, if there are many homes for sale and few buyers, it is a buyer’s market and buyers can negotiate lower prices.
12. Capital – Money, assets, or resources used to generate income. For example, an entrepreneur might use their own savings and investments from others as capital to start a new business.
13. Capital controls – Restrictions on the flow of capital in and out of a country, typically implemented by the government. For example, a government might impose capital controls to prevent a large outflow of money from the country during a financial crisis.
14. Capital markets – Financial markets where long-term investments, such as bonds and stocks, are bought and sold. For example, the New York Stock Exchange is a capital market where companies can raise capital by issuing shares of stock.
15. Cartel – An agreement between companies to limit competition and control prices. For example, OPEC is a cartel of oil-producing countries that work together to control the supply of oil and maintain high prices.
16. Central bank – A government-owned bank that manages a country’s monetary policy, including setting interest rates and printing money. For example, the Federal Reserve is the central bank of the United States and is responsible for setting interest rates and controlling the money supply.
17. Closed economy – An economy where trade with other countries is restricted. For example, North Korea is considered to have a closed economy because it has limited trade with other countries.
18. Collateral – An asset pledged as security for a loan, to be sold if the loan is not repaid. For example, if you take out a car loan, the car itself may be used as collateral to secure the loan. If you default on the loan, the lender can seize the car to recoup its losses.
19. Command economy – An economy where the government makes all decisions about production and distribution of goods and services. For example, in a command economy, the government might direct that all steel production be used for military purposes, even if consumers would prefer to have more steel for other uses.
20. Commodity – A basic good used in commerce, such as wheat, oil, or gold. For example, the price of commodities like oil and copper can fluctuate widely in response to changes in supply and demand.
21. Concentration – The degree to which a market is dominated by a few large firms. For example, a high concentration of market share in a specific industry may result in reduced competition and higher prices for consumers.
22. Crony capitalism – A system in which business success is dependent on close relationships between business people and government officials, rather than on merit and competition. For example, a company that receives favorable treatment from the government in the form of tax breaks or subsidies may be said to have benefited from crony capitalism.
23. Crowding out – The reduction in private investment that occurs as a result of government borrowing. For example, if the government increases its borrowing to finance its spending, it may “crowd out” private investment by driving up interest rates.
24. Currency peg – The linking of the value of one currency to another currency, typically through a central bank’s intervention in the foreign exchange market. For example, some countries may peg their currency to the US dollar to maintain stability and reduce the impact of fluctuations in the value of their own currency.
25. Default – The failure to repay a loan or meet the terms of a financial obligation. For example, a borrower who fails to make the required payments on a loan is said to have defaulted.
26. Deflation – A sustained decrease in the general price level of goods and services in an economy over a period of time. For example, if prices are falling for an extended period, deflation is said to be occurring.
27. Depreciation – The decrease in the value of an asset over time, due to factors such as wear and tear, obsolescence, or changes in market conditions. For example, a company might depreciate its machinery over a period of several years for tax purposes.
28. Depression – A prolonged period of economic decline characterized by falling output, high unemployment, and declining prices. For example, the Great Depression of the 1930s was a global economic depression that lasted for several years and had a profound impact on many countries.
29. Deregulation – The removal or reduction of government regulations on an industry or sector. For example, the deregulation of the telecommunications industry in the 1980s allowed new companies to enter the market and compete with established firms.
30. Derivatives – Financial instruments that are derived from other assets, such as stocks, bonds, commodities, or currencies. For example, options and futures contracts are common types of derivatives that allow investors to bet on the future price of an asset without actually owning the underlying asset.
31. Devaluation – The deliberate decrease in the value of a country’s currency relative to other currencies. For example, if a country’s central bank reduces the value of its currency, exports become cheaper and imports become more expensive, which can help to boost the country’s trade balance.
32. Disinflation – A reduction in the rate of inflation, but not a decrease in the actual price level. For example, if the rate of inflation is falling from 3% to 2%, disinflation is said to be occurring.
33. Dividend – A portion of a company’s earnings paid out to shareholders. For example, if a company has earnings of $100,000 and declares a dividend of $2 per share, each shareholder would receive a payment of $2 for each share they own.
34. Dollarisation – The widespread use of a foreign currency, such as the US dollar, as a medium of exchange within a country. For example, some countries with unstable currencies may experience dollarisation, where people and businesses use the US dollar instead of their own currency for transactions.
35. Dumping – The selling of goods in a foreign market at a price below the cost of production or below the price charged in the home market. For example, if a company in one country sells goods in another country at a lower price than it charges in its own market, it may be accused of “dumping” and facing trade penalties.
36. Economies of scale – The cost advantage that a company enjoys as it increases production. For example, if a company can produce a product more cheaply as it produces more of it, it is said to be experiencing economies of scale.
37. Elasticity – A measure of how responsive an economic variable is to changes in another variable. For example, the elasticity of demand refers to how much the quantity of a good demanded changes in response to a change in price.
38. Equilibrium – A state of balance in an economic system, where supply and demand are equal. For example, in a competitive market, the price of a good will adjust until the quantity supplied is equal to the quantity demanded, at which point the market is said to be in equilibrium.
39. Exchange controls – Government restrictions on the purchase or sale of foreign currencies. For example, if a government limits the amount of its currency that can be exchanged for foreign currencies, it is said to have exchange controls in place.
40. Exchange rate – The value of one currency in terms of another currency. For example, if the exchange rate between the US dollar and the euro is 1 USD = 0.9 EUR, this means that 1 US dollar can be exchanged for 0.9 euros.
41. Factor cost – The cost of the inputs used to produce a good or service, such as labour and raw materials. For example, if a company spends $100 on labour and $50 on raw materials to produce a product, its factor cost is $150.
42. Factors of production – The inputs used to produce a good or service, such as land, labour, capital, and entrepreneurship. For example, if a company uses land, labour, and capital to produce a product, these are the factors of production it uses.
43. Financial instrument – A product that represents a claim on financial assets or gives the holder a right to purchase or sell financial assets. For example, stocks, bonds, and options are all examples of financial instruments.
44. Fiscal drag – The reduction in consumer spending and economic activity that results from a rise in taxes. For example, if a government raises taxes, people will have less money to spend, which can lead to fiscal drag and a slowing of the economy.
45. Fiscal neutrality – The principle that changes in taxes and government spending should not affect the overall level of economic activity. For example, if a government implements fiscal policies that are neutral, they should not boost or slow down the economy.
46. Free riding – The act of taking advantage of the benefits provided by others without contributing to them. For example, if someone benefits from a public good without paying for it, they are said to be “free riding.”
47. Free trade – The absence of tariffs, quotas, and other restrictions on trade between countries. For example, if two countries have a free trade agreement, they allow each other’s goods and services to be traded freely, without any restrictions.
48. Frictional unemployment – Unemployment that results from the time it takes for workers to find new jobs when they lose their old ones. For example, if a worker loses their job and takes a few weeks to find a new one, this is an example of frictional unemployment.
49. Giffen good – A good for which an increase in price leads to an increase in demand. For example, if the price of rice increases, some people may choose to buy even more of it, as they see it as a luxury good. This is an example of a Giffen good.
50. Gini coefficient – A measure of inequality in distribution, with 0 representing perfect equality and 1 representing perfect inequality. For example, if the Gini coefficient of a country’s income distribution is 0.3, this means that the country has a relatively unequal distribution of income.
51. Gold standard – A monetary system in which the value of a currency is directly tied to the value of gold. For example, if a country uses the gold standard, each unit of currency can be exchanged for a fixed amount of gold.
52. Hedge – A financial strategy that aims to reduce the risk of loss from an investment. For example, if an investor buys a stock and also buys a put option on that stock, they are said to be “hedging” their investment.
53. Horizontal equity – The principle of fairness that holds that individuals in similar situations should be treated similarly by the tax system. For example, if two individuals have the same income, they should pay the same amount of taxes under the principle of horizontal equity.
54. Hot money – Funds that are invested in a country for a short period of time in response to changes in interest rates or other market conditions. For example, if investors move their money from one country to another in response to higher interest rates, they are said to be “hot money.”
55. Human capital – The knowledge, skills, and abilities of individuals that can be used to produce goods and services. For example, if a worker has education and experience that makes them more productive, this is an example of human capital.
56. Laffer curve – A graphical representation of the relationship between tax rates and government revenue, with the idea that tax revenue will eventually decline if tax rates are raised too high. For example, if a government raises tax rates to a point where it reduces economic activity and reduces tax revenue, this is said to be on the downward-sloping part of the Laffer curve.
57. Laissez-faire – The idea that the government should not interfere in the market and allow market forces to dictate economic activity. For example, if a country has a laissez-faire economic system, it allows the market to set prices and allocate resources without government intervention.
58. Liquidity – The ease with which an asset can be bought or sold without affecting its price. For example, if a stock can be bought or sold quickly and at a stable price, it is said to have high liquidity.
59. Market forces – The forces of supply and demand that dictate the price and quantity of goods and services in a market. For example, if the supply of a good is low and the demand is high, market forces will cause the price to rise.
60. Mixed economy – An economic system that combines elements of both a market economy and a command economy. For example, if a country has a mixed economy, it allows some economic activity to be determined by market forces and other activities to be controlled by the government.
61. Monopoly – A market structure in which there is only one seller of a product or service. For example, if there is only one company that produces a certain type of good, that company has a monopoly on that good.
62. Multiplier – An economic concept that refers to the impact of a change in spending on the overall level of economic activity. For example, if an increase in government spending leads to an increase in overall spending, this is an example of the multiplier effect.
63. Offshore: A location outside of a person’s or company’s home country, often used for financial or tax purposes. For example, if a company sets up a subsidiary in a country with lower tax rates, it is said to be operating “offshore.”
64. Oligopoly: An oligopoly is a market structure in which a few firms dominate the market. In an oligopoly, firms have a significant degree of control over the market and can influence prices, output and competition. For example, the automobile industry in many countries is dominated by a few large firms like Toyota, Ford, and General Motors.
65. Open economy: An open economy is an economy that interacts with other economies through trade, investment and financial flows. In an open economy, goods, services, capital and labor can move freely across borders. For example, countries like the United States, United Kingdom and Germany are considered to be open economies because of their high level of trade and investment with other countries.
66. Phillips Curve: A graphical representation of the relationship between inflation and unemployment, with the idea that lower unemployment is associated with higher inflation and vice versa. For example, if a country experiences a period of low unemployment, the Phillips curve predicts that inflation will rise.
67. Pigou Effect: An economic concept named after economist Arthur Pigou that refers to the idea that a tax on a negative externality (such as pollution) will result in a reduction in the activity causing the externality. For example, if a tax is imposed on companies that emit pollution, this is an example of the Pigou effect.
68. Price Elasticity: Price elasticity is a measure of how sensitive the demand for a good or service is to changes in its price. If the demand for a good is very sensitive to changes in price, it is said to be price elastic. For example, if the price of a good increases by 10% and demand for the good decreases by 20%, the demand for the good is said to be price elastic.
69. Public Goods: Goods or services that are provided by the government for the benefit of the general public. For example, national defense, public education, and public health services are all examples of public goods.
70. Purchasing Power Parity: The idea that the same goods and services should cost the same in different countries after accounting for differences in currency exchange rates. For example, if a pair of shoes costs $100 in the United States and €100 in the eurozone, they are said to have purchasing power parity if the exchange rate is $1 = €1.
71. Recession: A period of economic contraction characterized by a decrease in gross domestic product (GDP) for at least two consecutive quarters. For example, the Great Recession of 2008-2009 was a period of significant economic contraction in many countries around the world.
72. Reflation: A monetary or fiscal policy aimed at increasing the level of prices in an economy. For example, if a central bank increases the money supply in an effort to stimulate economic activity, this is an example of reflation.
73. Reserves: Assets held by a central bank or other financial institution to meet its liabilities and to ensure stability in the financial system. For example, if a central bank holds foreign currency reserves, it can use these reserves to maintain stability in the exchange rate.
74. Securities: Financial instruments that represent ownership in a company or a claim on a future stream of income. For example, stocks and bonds are both examples of securities.
75. Seignorage: The difference between the face value of money and the cost of producing it. For example, if it costs a central bank $0.10 to produce a $1 bill, the seignorage is $0.90.
76. Social capital: The benefits derived from social networks, including trust, cooperation, and knowledge sharing. For example, if a community has strong social capital, individuals are more likely to trust one another and cooperate on projects.
77. Stagflation: A period of economic contraction characterized by both rising prices (inflation) and high unemployment. For example, if a country experiences rising prices and high unemployment at the same time, it is said to be experiencing stagflation.
78. Structural unemployment: Unemployment that results from a mismatch between the skills of workers and the skills required for available jobs. For example, if workers in a particular industry lose their jobs due to technological change, this is an example of structural unemployment.
79. Tangible assets: Physical assets such as real estate, machinery, and equipment that have value and can be sold. For example, if a company owns a factory, the factory is a tangible asset.
80. Tariff: A tax on imports or exports. For example, if a country imposes a 10% tax on imported goods, this is an example of a tariff.
81. Tax haven: A country or jurisdiction with low tax rates and a favorable tax regime, used by individuals or companies to minimize their tax liability. For example, if a company sets up a subsidiary in a country with low tax rates, it is said to be using a tax haven.
82. Transfer pricing: The practice of determining the price of goods or services traded between different units within a company, often used to minimize tax liability. For example, if a company sells goods to a subsidiary at a lower price than the market price, this is an example of transfer pricing.
83. Treasury bills: Short-term debt instruments issued by a government with maturities of less than one year. For example, if a government wants to raise short-term funds, it can issue treasury bills to investors.
84. Unemployment trap: A situation in which people are discouraged from working due to a combination of high taxes and low benefit levels. For example, if high taxes reduce the incentive to work, and low benefit levels make unemployment an attractive option, this is an example of an unemployment trap.
85. Venture capital: A type of financing provided to startups and early-stage companies with high growth potential. For example, if a company receives investment from a venture capital firm, this is an example of venture capital financing.
86. Vertical equity: It refers to the principle of fairness in tax policy, where those with higher incomes pay a higher share of their income in taxes. For example, a progressive income tax system, where those with higher incomes pay a higher percentage of their income in taxes, is an example of vertical equity.
87. Volatility: It is a measure of how much the price of an asset, such as a stock or currency, changes over time. For example, the stock of a company in a highly competitive and rapidly changing industry may be highly volatile, with its price frequently fluctuating.
88. Yield: It is the return on investment, usually expressed as a percentage of the investment’s value. For example, if you invest $100 in a bond with a yield of 5%, you would receive $5 in interest income each year until the bond matures.

For Daily Current Affairs Click Here

Join our Official Telegram Channel HERE
Subscribe to our YouTube Channel HERE
Follow our Instagram ID HERE