If you are looking for a table showing how each of the National Standards fits into the key

concepts, see The 51 Key

Economics Concepts.
Basic Economics

National Standard

Key Concepts

Standard 1:
Scarcity

Scarcity

scarcity refers to limitationsinsufficient resources, goods, or abilities

to achieve the desired ends. Figuring out ways to make the best use of
scarce resources or find alternatives is fundamental to economics.
Consumers

One that consumes, especially one that acquires goods or services for
direct use or ownership rather than for resale or use in production and
manufacturing
Consumer protection: When you buy a good or service, you rarely
have perfect knowledge of its quality and safety( information
asymmetry). You are justifiably concerned about getting "ripped off."
Thus the need for consumer protection.
Economic activity flourishes when consumers can trust producers, but
the consumer must have grounds for trust. Consumers value, then, not
only quality and safety, but also the assurance of quality and safety.
Trust depends on assurance....
Opportunity Cost
the value of the next-highest-valued alternative use of that resource. If, for
example, you spend time and money going to a movie, you cannot spend that
time at home reading a book, and you can't spend the money on something
else. If your next-best alternative to seeing the movie is reading the book, then
the opportunity cost of seeing the movie is the money spent plus the pleasure
you forgo by not reading the book...
Getting the Most Out of Life: The Concept of Opportunity Cost, by Russ
Roberts on Econlib
To get the most out of life, to think like an economist, you have to be know
what you're giving up in order to get something else....
Sometimes people are very happy holding on to the naive view that something
is free. We like the idea of a bargain. We don't want to hear about the hidden
or non-obvious costs. Thinking about foregone opportunities, the choices we
didn't make, can lead to regret. Choosing this college means you can't go to
that one. Marrying this person means not marrying that one. Choosing this
desert (usually) means missing out on that one..

Productive Resources

The requirements for production, usually represented as capital,

labour, and land. Capital covers all man-made aids to future
production; fixed capital stays put, and includes the physical plant,

buildings, tools and machinery, while circulating capital includes raw

materials and components.
Labour includes all human resources. It may be unskilled, semi-skilled,
or skilled...

Human Capital

Schooling, a computer training course, expenditures of medical care,

and lectures on the virtues of punctuality and honesty also are capital.
That is because they raise earnings, improve health, or add to a
person's good habits over much of his lifetime. Therefore, economists
regard expenditures on education, training, medical care, and so on as
investments in human capital. They are called human capital because
people cannot be separated from their knowledge, skills, health, or
values in the way they can be separated from their financial and
physical assets...
Author Dan Pink talks about the ideas in his book, A Whole New
Mind: Why Right-Brainers Will Rule the Future. He argues that the
skills of the right side of the brainskills such as creativity, empathy,
contextual thinking and big picture thinkingare going to become
increasingly important as a response to competition from low-wage
workers overseas and our growing standard of living....

Entrepreneurs
Entrepreneurship is the process of identifying and starting a new business
venture, sourcing and organizing the required resources, while taking both the
risks and rewards associated with the venture.
An entrepreneur is someone who organizes, manages, and assumes the risks
of a business or enterprise. An entrepreneur is an agent of change.
Entrepreneurship is the process of discovering new ways of combining
resources. When the market value generated by this new combination of
resources is greater than the market value these resources can generate
elsewhere individually or in some other combination, the entrepreneur makes
a profit. An entrepreneur who takes the resources necessary to produce a pair
of jeans that can be sold for thirty dollars and instead turns them into a denim
backpack that sells for fifty dollars will earn a profit by increasing the value
those resources create. This comparison is possible because in competitive
resource markets, an entrepreneurs costs of production are determined by the
prices required to bid the necessary resources away from alternative uses.
Those prices will be equal to the value that the resources could create in their
next-best alternate uses. Because the price of purchasing resources measures
this opportunity cost the value of the forgone alternativesthe profit
entrepreneurs make reflects the amount by which they have increased the
value generated by the resources under their control.
Entrepreneurs who make a loss, however, have reduced the value created by
the resources under their control; that is, those resources could have produced
more value elsewhere. Losses mean that an entrepreneur has essentially
turned a fifty-dollar denim backpack into a thirty-dollar pair of jeans. This
error in judgment is part of the entrepreneurial learning, or discovery, process
vital to the efficient operation of markets. The profit-and-loss system of
capitalism helps to quickly sort through the many new resource combinations
entrepreneurs discover. A vibrant, growing economy depends on the efficiency
of the process by which new ideas are quickly discovered, acted on, and
labeled as successes or failures. Just as important as identifying successes is
making sure that failures are quickly extinguished, freeing poorly used
resources to go elsewhere. This is the positive side of business failure.
Successful entrepreneurs expand the size of the economic pie for everyone.
Bill Gates, who as an undergraduate at Harvard developed BASIC for the first
microcomputer, went on to help found Microsoft in 1975. During the 1980s,
IBM contracted with Gates to provide the operating system for its computers,
a system now known as MS-DOS. Gates procured the software from another
firm, essentially turning the thirty-dollar pair of jeans into a multibilliondollar product. Microsofts Office and Windows operating software now run
on about 90 percent of the worlds computers. By making software that
increases human productivity, Gates expanded our ability to generate output
(and income), resulting in a higher standard of living for all.
The word entrepreneur originates from a thirteenth-century French verb,
entreprendre, meaning to do something or to undertake. By the sixteenth
century, the noun form, entrepreneur, was being used to refer to someone who
undertakes a business venture. The first academic use of the word by an
economist was likely in 1730 by Richard Cantillon, who identified the
willingness to bear the personal financial risk of a business venture as the
defining characteristic of an entrepreneur. In the early 1800s, economists
Jean-Baptiste Say and John Stuart Mill further popularized the academic
usage of the word entrepreneur. Say stressed the role of the entrepreneur in

Producers
A producer is someone who creates and supplies goods or services. Producers
combine labor and capitalcalled factor inputs or factors of productionto
createthat is, to outputsomething else. Businessescalled "firms"are
the main examples of producers and are usually what economists have in
mind when talking about producers. However, governments are producers of
some kinds of servicessuch as police services, defense, public schools, and
mail deliveryand sometimes goods, such as when a government owns the
oil fields and oil production (for example, OPEC). Households and
individuals are producers of non-market goods and services such as cleaning,
child-rearing, cooked food, etc.
Producers pay wages to workers. Wages include salaries, bonuses, and
benefits such as health insurance. What producers pay for capital is called
economic rent. Economic rents include interest pyaments. Anything left over
for the owner of the business is called economic profit

Standard 2:
Marginal
Cost/Benefit

Decision Making and Cost-Benefit Analysis

Whenever people decide whether the advantages of a particular action are
likely to outweigh its drawbacks, they engage in a form of benefit-cost
analysis...
Costs and Benefits of preventing crime
Economists approach the analysis of crime with one simple assumptionthat
criminals are rational people. The decision to commit a crime, like any other
economic decision, can be analyzed as a choice among alternative
combinations of costs and benefits....
Recycling is appealing because it seems to offer a way to simultaneously
reduce the amount of waste disposed in landfills and to save natural
resources....
Hidden Costs. The promoter of an idea typically plays up the benefits and
plays down the costs. Economists delight in uncovering those hidden costs
and often enjoy a moment of fun by taking the promoter by surprise.
Famous essay about what economists do, emphasizing their role in pointing
out the unseen, unspoken costs behind great-sounding ideas. Examples
include national security, the arts, taxes, infrastructure, international trade,
jobs, credit, business, and private decisions.

Profit
Capitalists earn a return on their efforts by providing three productive inputs.
First, they are willing to delay their own personal gratification. Instead of
consuming all of their resources today, they save some of today's income and
invest those savings in activities (plant and equipment) that will yield goods
and services in the future....
Second, some profits are a return to those who take risks. Some investments
make a profit and return what was invested plus a profit, but others don't.
Third, some profits are a return to organizational ability, enterprise, and
entrepreneurial energy.

Standard 3:
Allocation of
Goods and
Services

Supply
The most basic laws in economics are the law of supply and the law of
demand. Indeed, almost every economic event or phenomenon is the product
of the interaction of these two laws.
One function of markets is to find "equilibrium" prices that balance the
supplies of and demands for goods and services....
Economists often talk of "demand curves" and "supply curves." A demand
curve traces the quantity of a good that consumers will buy at various prices.
As the price rises, the number of units demanded declines. That is because
everyone's resources are finite; as the price of one good rises, consumers buy
less of that and, sometimes, more of other goods that now are relatively
cheaper. Similarly, a supply curve traces the quantity of a good that sellers
will produce at various prices. As the price falls, so does the number of units
supplied. Equilibrium is the point at which the demand and supply curves
intersect--the single price at which the quantity demanded and the quantity
supplied are the same....
Why does the quantity supplied rise as the price rises and fall as the price
falls? The reasons really are quite logical. First, consider the case of a
company that makes a consumer product. Acting rationally, the company will
buy the cheapest materials (not the lowest quality, but the lowest cost for any
given level of quality). As production (supply) increases, the company has to
buy progressively more expensive (i.e., less efficient) materials or labor, and
its costs increase. It charges a higher price to offset its rising unit costs....

Economic Systems
Capitalism, from the Concise Encyclopedia of Economics
Capitalism, a term of disparagement coined by socialists in the midnineteenth
century, is a misnomer for "economic individualism," which Adam Smith
earlier called "the obvious and simple system of natural liberty." Economic
individualism's basic premise is that the pursuit of self-interest and the right to
own private property are morally defensible and legally legitimate. Its major
corollary is that the state exists to protect individual rights. Subject to certain
restrictions, individuals (alone or with others) are free to decide where to
invest, what to produce or sell, and what prices to charge, and there is no
natural limit to the range of their efforts in terms of assets, sales and profits, or
the number of customers, employees, and investors, or whether they operate
in local, regional, national, or international markets....
Socialism, from the Concise Encyclopedia of Economics
Socialismdefined as a centrally planned economy in which the government
controls all means of productionwas the tragic failure of the twentieth
century. Born of a commitment to remedy the economic and moral defects of
capitalism, it has far surpassed capitalism in both economic malfunction and
moral cruelty. Yet the idea and the ideal of socialism linger on. Whether
socialism in some form will eventually return as a major organizing force in
human affairs is unknown, but no one can accurately appraise its prospects
who has not taken into account the dramatic story of its rise and fall....
Communism, from the Concise Encyclopedia of Economics
Before the Russian Revolution of 1917, "socialism" and "communism" were
synonyms. Both referred to economic systems in which the government owns
the means of production. The two terms diverged in meaning largely as a
result of the political theory and practice of Vladimir Lenin (1870-1924)...
Like most contemporary socialists, Lenin believed that
socialism could not be attained without violent revolution. But
no one pursued the logic of revolution as rigorously as he.
After deciding that violent revolution would not happen
spontaneously, Lenin concluded that it must be engineered by
a quasi-military party of professional revolutionaries, which
he began and led. After realizing that the revolution would
have many opponents, Lenin determined that the best way to
quell resistance was with what he frankly called terror
mass executions, slave labor, and starvation. After seeing that
the majority of his countrymen opposed communism even
after his military triumph, Lenin concluded that one-party
dictatorship must continue until it enjoyed unshakeable
popular support. In the chaos of the last years of World War I,
Lenins tactics proved an effective way to seize and hold
power in the former Russian Empire. Socialists who embraced
Lenins methods became known as communists and
eventually came to power in China, Eastern Europe, North
Korea, Indo-China, and elsewhere.
The most important fact to understand about the economics

Competition and Market Structures

"Competition," wrote Samuel Johnson, "is the act of endeavoring to gain what
another endeavors to gain at the same time." We are all familiar with
competitionfrom childhood games, from sporting contests, from trying to
get ahead in our jobs. But our firsthand familiarity does not tell us how vitally
important competition is to the study of economic life. Competition for scarce
resources is the core concept around which all modern economics is built....
Economic competition takes place in markets--meeting grounds of intending
suppliers and buyers. Typically, a few sellers compete to attract favorable
offers from prospective buyers. Similarly, intending buyers compete to obtain
good offers from suppliers. When a contract is concluded, the buyer and seller
exchange property rights in a good, service, or asset. Everyone interacts
voluntarily, motivated by self-interest.
In the process of such interactions, much information is signaled through
prices. Keen sellers cut prices to attract buyers, and buyers reveal their
preferences by raising their offers to outcompete other buyers. When a deal is
done, no one may be entirely happy with the agreed price, but both contract
partners feel better off. If prices exceed costs, sellers make a profit, an
inducement to supply more. When other competitors learn what actions lead
to profits, they may emulate the original supplier. Conversely, losses tell
suppliers what to abandon or modify....

Standard 4: Role
of Incentives

Incentives
The Power of Incentives, by Dwight Lee. At CommonSenseEconomics.com.
Also available: audio.
The surest way to get people to behave in desirable ways is to reward them for
doing soin other words provide them with incentives. This is so obvious
that you might think it hardly deserves mention. But it does.
You might say that people shouldn't have to be rewarded (bribed) to do
desirable things. Even when you acknowledge that incentives are necessary, it
is not obvious how to establish the ones that motivate desirable action.
In one of my classes, I recently encountered the emotional resistance some
people have to using incentives to accomplish good things. I was pointing out
that the elephant populations in Zimbabwe and South Africa were expanding
because policies there allow people to profit from maintaining elephant herds.
A student who had stressed his environmental sensitivity responded that he
would rather not see the elephant saved if the only way to do so was by
relying on people's greed. In other words, he was willing to stand on principle
as long as only the elephants suffered the consequences. His principle, one
that I suspect was shared by others in the class, was that good things should be
motivated by compassion and concern, not self-interest....

Trade and International Economics

National
Standard

Key Concepts

Standard 5:
Gain from
Trade

Trade, Exchange and Interdependence

Free Trade,
For more than two centuries economists have steadfastly promoted free trade among
nations as the best trade policy. Despite this intellectual barrage, many "practical"
men and women continue to view the case for free trade skeptically, as an abstract
argument made by ivory tower economists with, at most, one foot on terra firma.
These practical people "know" that our vital industries must be protected from foreign
competition.
Spatial Economics,
Producers and buyers are dispersed in space, and overcoming the distances between
them can be costly. Much commercial activity is concerned with "space bridging,"
and much entrepreneurship is aimed at making good use of locational opportunities
and cutting the costs of transport and communication. Spatial economics is the study
of how space (distance) affects economic behavior

Benefits of Trade and Comparative Advantage

Comparative Advantage, on Econlib
A person has a comparative advantage at producing something if he can produce it at
lower cost than anyone else..
Having a comparative advantage is not the same as being the best at something. In
fact, someone can be completely unskilled at doing something, yet still have a
comparative advantage at doing it! How can that happen?..

Barriers to Trade
A barrier to trade is a government-imposed restraint on the flow of international
goods or services.
The most common barrier to trade is a tariffa tax on imports. Tariffs raise the price
of imported goods relative to domestic goods (goods produced at home).
Another common barrier to trade is a government subsidy to a particular domestic
industry. Subsidies make those goods cheaper to produce than in foreign markets.
This results in a lower domestic price. Both tariffs and subsidies raise the price of
foreign goods relative to domestic goods, which reduces imports.
Yet another barrier to trade is an embargoa blockade or political agreement that
limits a foreign country's ability to export or import.

Barriers to trade are often called "protection" because their stated purpose is to shield
or advance particular industries or segments of an economy. From an economic
perspective, though, the costs to the economy almost always outweigh the benefits
enjoyed by those who are protected.

Balance of Trade and Balance of Payments

Balance of Payments, from the Concise Encyclopedia of Economics
The balance of payments accounts of a country record the payments and receipts of
the residents of the country in their transactions with residents of other countries. If
all transactions are included, the payments and receipts of each country are, and must
be, equal. Any apparent inequality simply leaves one country acquiring assets in the
others. For example, if Americans buy automobiles from Japan, and have no other
transactions with Japan, the Japanese must end up holding dollars, which they may
hold in the form of bank deposits in the United States or in some other U.S.
investment. The payments of Americans to Japan for automobiles are balanced by the
payments of Japanese to U.S. individuals and institutions, including banks, for the
acquisition of dollar assets. Put another way, Japan sold the United States
automobiles, and the United States sold Japan dollars or dollar-denominated assets
such as Treasury bills and New York office buildings....
Although the totals of payments and receipts are necessarily equal, there will be
inequalitiesexcesses of payments or receipts, called deficits or surplusesin
particular kinds of transactions. Thus, there can be a deficit or surplus in any of the
following: merchandise trade (goods), services trade, foreign investment income,
unilateral transfers (foreign aid), private investment, the flow of gold and money
between central banks and treasuries, or any combination of these or other
international transactions.

Foreign Currency Markets and Exchange Rates

Exchange Rates, from Answers.com
The price of one country's currency expressed in another country's currency. In other
words, the rate at which one currency can be exchanged for another. For example, the
higher the exchange rate for one euro in terms of one yen, the lower the relative value
of the yen....

Standard 6:
Specialization
and Trade

Division of Labor and Specialization

As it is the power of exchanging that gives occasion to the division of labour, so the
extent of this division must always be limited by the extent of that power, or, in other
words, by the extent of the market. When the market is very small, no person can
have any encouragement to dedicate himself entirely to one employment, for want of
the power to exchange all that surplus part of the produce of his own labour, which is
over and above his own consumption, for such parts of the produce of other men's
labour as he has occasion for....
Specialization and Wealth, by Dwight Lee. At CommonSenseEconomics.com. Also
available: audio.
A remarkable degree of social cooperation emerges through market communication.
Now, let's consider some of the advantages we realize from that cooperation. At a
general level these advantages are obvious. It simply makes sense that we can
produce more if our actions are in harmony than if we are working at cross-purposes.
But to really understand economics, we must consider the link between cooperation
and productivity in detail.
Wealth seldom comes as manna from heaven. It has to be produced by applying
human effort, intelligence, and patience to natural endowments that yield their bounty
reluctantly. This should be obvious. But one measure of the success of the
marketplace at improving our productive powers is that it has become all too easy for
people to assume that wealth is part of the natural order of things. Academics and
policy wonks consider the distribution of wealth to be the primary issue, while
dismissing any concern that their policy prescriptions could hamper its production.
They drone on and on about the causes of poverty (or the "improper" distribution of
wealth), apparently unaware that determining the causes of wealth is the serious
challenge....
Benefits of Trade and Comparative Advantage
Productive Resources

Economic Development (N.B. closest fit)

Real vs. Nominal
Real versus nominal value, at Answers.com
In economics, the nominal values of something are its money values in different
years. Real values adjust for differences in the price level in those years. Examples
include a bundle of commodities, such as Gross Domestic Product, and income. For a
series of nominal values in successive years, different values could be because of
differences in the price level. But nominal values do not specify how much of the
difference is from changes in the price level. Real values remove this ambiguity. Real
values convert the nominal values as if prices were constant in each year of the series.

Any differences in real values are then attributed to differences in quantities of the
bundle or differences in the amount of goods that the money incomes could buy in
each year....
Relative price is another term for the real price of a good or service. When we say that
the relative price of computers has fallen in recent years, we mean that the price of
computers relative to or measured in terms of other goods and servicessuch as TVs
or carshas declined. Relative prices of individual goods and services can decrease
even if nominal prices are all increasing, because of inflation.
Employment and Unemployment
Each month, the federal government's Bureau of Labor Statistics randomly surveys
sixty thousand individuals around the nation. If respondents say they are both out of
work and seeking employment, they are counted as unemployed members of the labor
force. Jobless respondents who have chosen not to continue looking for work are
considered out of the labor force and therefore are not counted as unemployed...
Full Employment: Business Cycles, from the Concise Encyclopedia of Economics
Just as there is no regularity in the timing of business cycles, there is no reason why
cycles have to occur at all. The prevailing view among economists is that there is a
level of economic activity, often referred to as full employment, at which the
economy theoretically could stay forever. Full employment refers to a level of
production at which all the inputs to the production process are being used, but not so
intensively that they wear out, break down, or insist on higher wages and more
vacations. If nothing disturbs the economy, the full-employment level of output,
which naturally tends to grow as the population increases and new technologies are
discovered, can be maintained forever. There is no reason why a time of full
employment has to give way to either a full-fledged boom or a recession....

Microeconomics

National
Standard

Key Concepts

Standard 7:
Markets
Price and
Quantity
Determination

Demand
Demand, from the Concise Encyclopedia of Economics
One of the most important building blocks of economic analysis is the concept of
demand. When economists refer to demand, they usually have in mind not just a
single quantity demanded, but what is called a demand curve. A demand curve traces
the quantity of a good or service that is demanded at successively different prices.
The most famous law in economics, and the one that economists are most sure of, is
the law of demand. On this law is built almost the whole edifice of economics. The
law of demand states that when the price of a good rises, the amount demanded falls,
and when the price falls, the amount demanded rises...
Supply
Markets and Prices
Macroeconomics
At the root of everything is supply and demand. It is not at all farfetched to think of
these as basically human characteristics. If human beings are not going to be totally
self-sufficient, they will end up producing certain things that they trade in order to
fulfill their demands for other things. The specialization of production and the
institutions of trade, commerce, and markets long antedated the science of
economics. Indeed, one can fairly say that from the very outset the science of
economics entailed the study of the market forms that arose quite naturally (and
without any help from economists) out of human behavior. People specialize in what
they think they can do best--or more existentially, in what heredity, environment, fate,
and their own volition have brought them to do. They trade their services and/or the
products of their specialization for those produced by others. Markets evolve to
organize this sort of trading, and money evolves to act as a generalized unit of
account and to make barter unnecessary.
Competition and Market Structures

Real vs. Nominal

Inflation
Price Ceilings and Floors
Price Controls, from the Concise Encyclopedia of Economics

Governments have been trying to set maximum or minimum prices since ancient
times. The Old Testament prohibited interest on loans, medieval governments fixed
the maximum price of bread, and in recent years governments in the United States
have fixed the price of gasoline, the rent on apartments in New York City, and the
minimum wage, to name a few. At times governments go beyond fixing specific
prices and try to control the general level of prices, as was done in the United States
during both world wars, during the Korean War, and by the Nixon administration
from 1971 to 1973.
The appeal of price controls is understandable. Even though they fail to protect many
consumers and hurt others, controls hold out the promise of protecting groups that are
particularly hard-pressed to meet price increases. Thus, the prohibition against
usury--charging high interest on loans--was intended to protect someone forced to
borrow out of desperation; the maximum price for bread was supposed to protect the
poor, who depended on bread to survive; and rent controls were supposed to protect
those who were renting when the demand for apartments exceeded the supply, and
landlords were preparing to "gouge" their tenants....
The reason most economists are skeptical about price controls is that they distort the
allocation of resources. To paraphrase a remark by Milton Friedman, economists may
not know much, but they do know how to produce a shortage or surplus. Price
ceilings, which prevent prices from exceeding a certain maximum, cause shortages.
Price floors, which prohibit prices below a certain minimum, cause surpluses, at least
for a time. Suppose that the supply and demand for wheat flour are balanced at the
current price, and that the government then fixes a lower maximum price. The supply
of flour will decrease, but the demand for it will increase. The result will be excess
demand and empty shelves. Although some consumers will be lucky enough to
purchase flour at the lower price, others will be forced to do without.
Rent Control, from the Concise Encyclopedia of Economics
Rent control, like all other government-mandated price controls, is a law placing a
maximum price, or a "rent ceiling," on what landlords may charge tenants. If it is to
have any effect, the rent level must be set at a rate below that which would otherwise
have prevailed....
Minimum Wages, from the Concise Encyclopedia of Economics
Minimum wage laws set legal minimums for the hourly wages paid to certain groups
of workers. In the United States, amendments to the Fair Labor Standards Act have
increased the federal minimum wage from $.25 per hour in 1938 to $5.15 in 1997.
Minimum wage laws were invented in Australia and New Zealand with the purpose
of guaranteeing a minimum standard of living for unskilled workers. Most
noneconomists believe that minimum wage laws protect workers from exploitation
by employers and reduce poverty. Most economists believe that minimum wage laws
cause unnecessary hardship for the very people they are supposed to help....
Agricultural Subsidy Programs, from the Concise Encyclopedia of Economics
Farm subsidies stimulate additional production of government-favored commodities
by raising incentives to use scarce land and farmer talent on some products rather
than on others. The specifics of the government program determine the degree of
production stimulus; real farm programs are usually much more complex than the per
unit production subsidies or price supports described in textbooks. Eliminating a
subsidy for just one crop would cause production of that crop to fall much more than

if all crop subsidies were eliminated simultaneously. Because most farmland would
remain in use, economists would expect relatively small adjustments in total U.S.
agricultural production if all farm subsidies were eliminated together, although some
shifts in the mix among commodities would occur.... Price Controls, from the Concise
Encyclopedia of Economics
Governments have been trying to set maximum or minimum prices since ancient
times. The Old Testament prohibited interest on loans, medieval governments fixed
the maximum price of bread, and in recent years governments in the United States
have fixed the price of gasoline, the rent on apartments in New York City, and the
minimum wage, to name a few. At times governments go beyond fixing specific
prices and try to control the general level of prices, as was done in the United States
during both world wars, during the Korean War, and by the Nixon administration
from 1971 to 1973.
The appeal of price controls is understandable. Even though they fail to protect many
consumers and hurt others, controls hold out the promise of protecting groups that are
particularly hard-pressed to meet price increases. Thus, the prohibition against
usury--charging high interest on loans--was intended to protect someone forced to
borrow out of desperation; the maximum price for bread was supposed to protect the
poor, who depended on bread to survive; and rent controls were supposed to protect
those who were renting when the demand for apartments exceeded the supply, and
landlords were preparing to "gouge" their tenants....
The reason most economists are skeptical about price controls is that they distort the
allocation of resources. To paraphrase a remark by Milton Friedman, economists may
not know much, but they do know how to produce a shortage or surplus. Price
ceilings, which prevent prices from exceeding a certain maximum, cause shortages.
Price floors, which prohibit prices below a certain minimum, cause surpluses, at least
for a time. Suppose that the supply and demand for wheat flour are balanced at the
current price, and that the government then fixes a lower maximum price. The supply
of flour will decrease, but the demand for it will increase. The result will be excess
demand and empty shelves. Although some consumers will be lucky enough to
purchase flour at the lower price, others will be forced to do without.
Rent Control, from the Concise Encyclopedia of Economics
Rent control, like all other government-mandated price controls, is a law placing a
maximum price, or a "rent ceiling," on what landlords may charge tenants. If it is to
have any effect, the rent level must be set at a rate below that which would otherwise
have prevailed....
Minimum Wages, from the Concise Encyclopedia of Economics
Minimum wage laws set legal minimums for the hourly wages paid to certain groups
of workers. In the United States, amendments to the Fair Labor Standards Act have
increased the federal minimum wage from $.25 per hour in 1938 to $5.15 in 1997.
Minimum wage laws were invented in Australia and New Zealand with the purpose
of guaranteeing a minimum standard of living for unskilled workers. Most
noneconomists believe that minimum wage laws protect workers from exploitation
by employers and reduce poverty. Most economists believe that minimum wage laws
cause unnecessary hardship for the very people they are supposed to help....
Agricultural Subsidy Programs, from the Concise Encyclopedia of Economics

Farm subsidies stimulate additional production of government-favored commodities

by raising incentives to use scarce land and farmer talent on some products rather
than on others. The specifics of the government program determine the degree of
production stimulus; real farm programs are usually much more complex than the per
unit production subsidies or price supports described in textbooks. Eliminating a
subsidy for just one crop would cause production of that crop to fall much more than
if all crop subsidies were eliminated simultaneously. Because most farmland would
remain in use, economists would expect relatively small adjustments in total U.S.
agricultural production if all farm subsidies were eliminated together, although some
shifts in the mix among commodities would occur....

Foreign Currency Markets and Exchange Rates

Standard 8:
Role of Price
in Market
System

Demand
Elasticity of Demand (N.B. closest fit)
Elasticity and Its Expansion, by Morgan Rose in Teacher's Corner at Econlib
As this semester closed, I asked several colleagues who taught introductory
economics courses to name the most difficult topics to teach to first-time economics
students. There was some variation in their answers, but one concept was mentioned
far more often than any otherelasticity. In this Teacher's Corner, we will define
what elasticity means in economics, explain how one particular type of elasticity is
calculated, and discuss why the concept is critical to economic agents trying to
maximize their revenue....
Supply
Markets and Prices
Competition and Market Structures

Market Failures
Definition: Market failure, from Answers.com
An economic term that encompasses a situation where, in any given market, the
quantity of a product demanded by consumers does not equate to the quantity
supplied by suppliers. This is a direct result of a lack of certain economically ideal
factors, which prevents equilibrium....
Public goods and externalities. What is an externality? Public Goods and
Externalities, from the Concise Encyclopedia of Economics
Most economic arguments for government intervention are based on the idea that the
marketplace cannot provide public goods or handle externalities. Public health and
welfare programs, education, roads, research and development, national and domestic
security, and a clean environment all have been labeled public goods....
Externalities occur when one person's actions affect another person's well-being and
the relevant costs and benefits are not reflected in market prices. A positive
externality arises when my neighbors benefit from my cleaning up my yard. If I
cannot charge them for these benefits, I will not clean the yard as often as they would
like. (Note that the free-rider problem and positive externalities are two sides of the
same coin.) A negative externality arises when one person's actions harm another.
When polluting, factory owners may not consider the costs that pollution imposes on
others....
What is a public good? Defense, from the Concise Encyclopedia of Economics
National defense is a public good. That means two things. First, consumption of the
good by one person does not reduce the amount available for others to consume.
Thus, all people in a nation must "consume" the same amount of national defense (the
defense policy established by the government). Second, the benefits a person derives
from a public good do not depend on how much that person contributes toward
providing it. Everyone benefits, perhaps in differing amounts, from national defense,
including those who do not pay taxes. Once the government organizes the resources
for national defense, it necessarily defends all residents against foreign aggressors....
Market-clearing vs. sticky prices: New Keynesian Economics, from the Concise
Encyclopedia of Economics
The primary disagreement between new classical and new Keynesian economists is
over how quickly wages and prices adjust. New classical economists build their
macroeconomic theories on the assumption that wages and prices are flexible. They
believe that prices "clear" marketsbalance supply and demandby adjusting
quickly. New Keynesian economists, however, believe that market-clearing models
cannot explain short-run economic fluctuations, and so they advocate models with
"sticky" wages and prices. New Keynesian theories rely on this stickiness of wages
and prices to explain why involuntary unemployment exists and why monetary policy
has such a strong influence on economic activity....
Markets can fail if there are no property rights and negotiation is costly. The Coase
Theorem: Ronald H. Coase, biography from the Concise Encyclopedia of Economics
"The Problem of Social Cost," Coase's other widely cited article (661 citations
between 1966 and 1980), was even more path-breaking. Indeed, it gave rise to the
field called law and economics. Economists b.c. (Before Coase) of virtually all
political persuasions had accepted British economist Arthur Pigou's idea that if, say, a
cattle rancher's cows destroy his neighboring farmer's crops, the government should

Price Ceilings and Floors

Real vs. Nominal
Inflation
Foreign Currency Markets and Exchange Rates
Standard 9:
Role of
Competition

Competition and Market Structures

Market Failures

Standard 10:
Role of
Economic
Institutions

Economic Institutions
Property Rights
Property Rights, from the Concise Encyclopedia of Economics
A property right is the exclusive authority to determine how a resource is used,
whether that resource is owned by government or by individuals. Society approves
the uses selected by the holder of the property right with governmental administered
force and with social ostracism. If the resource is owned by the government, the
agent who determines its use has to operate under a set of rules determined, in the
United States, by Congress or by executive agencies it has charged with that role....

Credit
Bonds, Borrowing, and Lending, on Econlib.
A bond is a promise to pay. It is a promise to pay something in the future in exchange
for receiving something today.
Promisesthat is, bondscan be bought and sold. The buyer of a bond is a lender.
The seller of a bond is a borrower. The bond buyers pay now in exchange for
promises of future repaymentthat is, they are lenders. The bond sellers receive
money now and in exchange for their promises of future repaymentthat is, they are
borrowers.
Bonds can be traded privately between individuals or in organized markets, called
bond markets or credit markets.
You may not realize it, but you buy and sell bonds all the time! Every time you lend
someone a few dollars for lunch or borrow your friend's car in exchange for filling
her tank, in economic terms you are buying and selling bonds. Simply remembering
that bond buyers are lenders, bond sellers are borrowers, and that they are trading not
pieces of paper but promises, can unlock the door to understanding both the
vocabulary and the economics of a wide range of economic behavior, from private
loans to interest rates to government budget deficits. It's much easier to understand
borrowing and lending than abstract vocabulary like "the bond market"even though
they are the same thingbecause we can by think about our own familiar
experiences with borrowing and lending....
When you use your credit cards or buy on installment, you are a borrower. In each
case, someonea bank or business ownerlends you the money by directly paying
for the goods up front on your behalf. The lender later sends you a bill, at which time
you are responsible to pay the principal and any accumulated interest to the lender. In
economic terms, every time you use your credit card, you sell a bondyour promise
to repay the credit card company in the future.
When you deposit money in a bank, you are a lender! In economic terms, you buy the
bank's bond its commitment to repay you when you decide to use the money. The
bank acts as an intermediary (a go-between) and pairs you with a borrower....
Here's another example. When you buy a Treasury Bill, you are lending to the
government. The government sells its promises to pay in organized markets each
week....
Classroom activity. To illustrate these concepts in the classroom, I've often held a
bond auction in class!

Compound Interest
When you borrow money from a bank, you pay interest. Interest is really a fee
charged for borrowing the money, it is a percentage charged on the principle amount
for a period of a yearusually....
Compound interest is paid on the original principal and on the accumulated past
interest....
If you borrow for 5 years the formula will look like A=P(1+r)5....
Calculate how much you'll save: Compound Interest Calculator, from About.com
The compound interest calculator is intended to show you how much you'll have
saved after a given number of years. You'll know how much of your final balance is
due to interest earnings, and you can use the compound interest calculator to see how
different interest rates affect the outcome....
Rule of 72: EconomicGrowth, from the Concise Encyclopedia of Economics
In the modern version of an old legend, an investment banker asks to be paid by
placing one penny on the first square of a chess board, two pennies on the second
square, four on the third, etc. If the banker had asked that only the white squares be
used, the initial penny would double in value thirty-one times, leaving $21.5 million
on the last square. Using both the black and the white squares makes the penny grow
to $92,000,000 billion....
You can figure out how long it takes income to double by dividing the growth rate
into the number 72. If growth in the United States continues at the annual rate of 2.1
percent, income per capita will double every 34 years (72/2.1 = 34). In 102 years,
income will increase eightfold. This increase is large, but not unprecedented....
Employment and Unemployment

Macroeconomics

National
Standard

Key Concepts

Standard 11:
Role of
Money

Money
Money is a good that acts as a medium of exchange in transactions. Classically it is
said that money acts as a unit of account, a store of value, and a medium of
exchange....
Money Supply, from the Concise Encyclopedia of Economics
The U.S. money supply comprises currencydollar bills and coins issued by the
Federal Reserve System and the Treasuryand various kinds of deposits held by the
public at commercial banks and other depository institutions such as savings and
loans and credit unions....
Monetary Policy and the Federal Reserve
Monetary Policy, from the Concise Encyclopedia of Economics
Total currency in public circulation outside banks was $664 billion at year-end 2003.
Banks' reserves--the currency in their vaults plus their deposits in the Fed--were $89
billion. The two together constitute the monetary base (M0 or MB), $753 billion at
year-end 2003....
A bank in need of reserves can borrow reserve balances on deposit in the Fed from
other banks. Loans are made for one day at a time in the "federal funds" market.
Interest rates on these loans are quoted continuously. Central bank open-market
operations are interventions in this market. When the Federal Reserve (or other central
bank) conducts an open-market operation, it typically buys treasury bills, paying for
them with reserves, or sells them, taking reserves in payment. Open-market operations
thus amount to interventions in the federal funds market. Banks can also borrow from
the Federal Reserve banks themselves, at their announced discount rates, which are in
practice the same at all twelve banks. Nowadays it is secondary to open-market
operations, and the Fed generally keeps the discount rate close to the federal funds
market rate. However, announcing a new discount rate is often a convenient way to
send a message to the money markets. In addition to its responsibilities for
macroeconomic stabilization, the central bank has a traditional safety-net role in
temporarily assisting individual banks and in preventing or stemming systemic panics
as "lender of last resort."...
Money Management and Budgeting

Trade, Exchange and Interdependence

Standard 12:
Role of
Interest Rates

Compound Interest
Monetary Policy and the Federal Reserve

Real vs. Nominal

Risk and Return
Risk-Return Tradeoff, from Investopedia.com
The principle that potential return rises with an increasein risk. Low levels of
uncertainty (low risk) are associated with low potential returns, whereas high levels of
uncertainty (high risk) are associated with high potential returns. In other words, the
risk-return tradeoff says that investedmoney can render higher profits only if it is
subject to the possibility ofbeing lost...
Saving and Investing
Saving, from the Concise Encyclopedia of Economics
Saving means different things to different people. To some it means putting money in
the bank. To others it means buying stocks or contributing to a pension plan. But to
economists, saving means only one thingconsuming less in the present in order to
consume more in the future.
An easy way to understand the economist's view of savingand its importance for
economic growthis to consider an economy in which there is a single commodity,
say, corn. The amount of corn on hand at any point in time can either be consumed
(literally gobbled up) or saved. Any corn that is saved is immediately planted
(invested), yielding more corn in the future. Hence, saving adds to the stock of corn in
the ground, or in economic jargon, the stock of capital. The greater the stock of
capital, the greater the amount of future corn, which can, in turn, either be consumed
or saved....
Investment, from the Concise Encyclopedia of Economics
Although in general parlance investment may connote many types of economic
activity, economists normally use the term to describe the purchase of durable goods
by households, businesses, and governments. Private (nongovernmental) investment
is commonly divided into three broad categories: residential investment, which
accounts for about a quarter of all private investment (25.7 percent in 1990);
nonresidential, or business, fixed investment, which accounts for most of the
remainder; and inventory investment, which is small but volatile. Indeed, inventory
investment is often negative (it was in 1990, and in three years during the eighties).
Business fixed investment, in turn, is composed of equipment and nonresidential
structures. Equipment now makes up over three-quarters of business investment...
Standard 13:
Role of
Resources in
Determining
Income

Income Distribution
Distribution of Income, from the Concise Encyclopedia of Economics
The distribution of income is central to one of the most enduring issues in political
economics. On one extreme are those who argue that all incomes should be the same,
or as nearly so as possible, and that a principal function of government should be to
redistribute income from the haves to the have-nots. On the other extreme are those
who argue that any income redistribution by government is bad...

Aggregate Demand (AD)

Keynesian Economics, from the Concise Encyclopedia of Economics
Keynesian economics is a theory of total spending in the economy (called aggregate
demand) and of its effects on output and inflation....
Aggregate Demand, at Answers.com
The total amount of goods and services demanded in the economy at a given overall
price level and in a given time period. It is represented by the aggregate-demand
curve, which describes the relationship between price levels and the quantity of output
that firms are willing to provide. Normally there is a negative relationship between
aggregate demand and the price level. Also known as "total spending".
New Classical Macroeconomics, from the Concise Encyclopedia of Economics
According to Keynes, the classics saw the price system in a free economy as
efficiently guiding the mutual adjustment of supply and demand in all markets,
including the labor market. Unemployment could arise only because of a market
imperfection--the intervention of the government or the action of labor unions--and
could be eliminated through removing the imperfection. In contrast, Keynes shifted
the focus of his analysis away from individual markets to the whole economy. He
argued that even without market imperfections, aggregate demand (equal, in a closed
economy, to consumption plus investment plus government expenditure) might fall
short of the aggregate productive capacity..

Aggregate Supply (AS)

Aggregate Supply, at Answers.com
The total supply of goods and services produced within an economy at a given overall
price level in a given time period. It is represented by the aggregate-supply curve,
which describes the relationship between price levels and the quantity of output that
firms are willing to provide. Normally, there is a positive relationship between
aggregate supply and the price level. Rising prices are usually signals for businesses
to expand production to meet a higher level of aggregate demand.
New Classical Macroeconomics, from the Concise Encyclopedia of Economics
Shocks to aggregate supply are typically changes in productivity that may result, for
example, from transient changes to technology, prices of raw materials, or the
organization of production. Ideally, firms would choose to produce more and to pay
their workers more when the economy has been hit by favorable shocks and less when
hit by unfavorable shocks. Similarly, workers would be willing to work more when
productivity and wage rates are higher and to take more leisure when their rewards are
lower. For both, the rule is "make hay while the sun shines."...
Demand
Productive Resources

Standard 14:
Profit and the
Entrepreneur

Entrepreneurs
Decision Making and Cost-Benefit Analysis
Risk and Return
Roles of Government
Public Goods and Externalities, from the Concise Encyclopedia of Economics
Most economic arguments for government intervention are based on the idea that the
marketplace cannot provide public goods or handle externalities. Public health and
welfare programs, education, roads, research and development, national and domestic
security, and a clean environment all have been labeled public goods.
Public goods have two distinct aspects"nonexcludability" and "nonrivalrous
consumption." Nonexcludability means that nonpayers cannot be excluded from the
benefits of the good or service. If an entrepreneur stages a fireworks show, for
example, people can watch the show from their windows or backyards. Because the
entrepreneur cannot charge a fee for consumption, the fireworks show may go
unproduced, even if demand for the show is strong....
Government Spending, from the Concise Encyclopedia of Economics
In the past, government spending increased during wars and then typically took some
time to fall back to its previous level. Because the effects of World War I were not
totally gone by 1929, the line for the United States from 1790 to 1929 has a very
slight upward slant. But in the second quarter of the twentieth century, government
spending began a rapid and steady increase. While economists and political scientists
have offered many theories about what determines the level of government spending,
there really is no known explanation for either part of this historical record....
Distribution of Income, from the Concise Encyclopedia of Economics
The distribution of income is central to one of the most enduring issues in political
economics. On one extreme are those who argue that all incomes should be the same,
or as nearly so as possible, and that a principal function of government should be to
redistribute income from the haves to the have-nots. On the other extreme are those
who argue that any income redistribution by government is bad....
Federal Budget, from the Concise Encyclopedia of Economics
Deficit spending has been a way of life for the federal government for most years
since World War II. A whole generation of elected federal officials has come and gone
without ever balancing the budget. The last time that federal budget expenditures were
brought into balance with revenues was in 1969, and prior to that the last time was in
1960....
Taxation, A Preface, from the Concise Encyclopedia of Economics
Economists specializing in public finance have long enumerated four objectives of tax
policy: simplicity, efficiency, fairness, and revenue sufficiency. While these objectives
are widely accepted, they often conflict, and different economists have different views

of the appropriate balance among them....

Profit
Standard 15:
Growth

Economic Growth
Economic Growth, from the Concise Encyclopedia of Economics
Economic growth occurs whenever people take resources and rearrange them in ways
that are more valuable. A useful metaphor for production in an economy comes from
the kitchen. To create valuable final products, we mix inexpensive ingredients
together according to a recipe. The cooking one can do is limited by the supply of
ingredients, and most cooking in the economy produces undesirable side effects. If
economic growth could be achieved only by doing more and more of the same kind of
cooking, we would eventually run out of raw materials and suffer from unacceptable
levels of pollution and nuisance. Human history teaches us, however, that economic
growth springs from better recipes, not just from more cooking. New recipes
generally produce fewer unpleasant side effects and generate more economic value
per unit of raw material....
Productivity
Productivitythe amount of output per unit of inputis a basic yardstick of an
economy's health. When productivity is growing, living standards tend to rise. When
productivity is stagnating, so, generally, is well-being....
Productivity can be defined in two basic ways. The most familiar, labor productivity,
is simply output divided by the number of workers or, more often, by the number of
hours worked. Output can be anything from tons of steel to airline miles flown, but
more generally it is some very broad aggregate like gross domestic product. Measures
of labor productivity, however, actually capture the contribution to output of other
inputs than hours worked.
Total factor productivity, by contrast, captures the contribution to output of everything
except labor and capital: innovation, managerial skill, organization, even luck....
[See also the updated article, Productivity.]
Competitiveness, from the Concise Encyclopedia of Economics
"Competitiveness," particularly with reference to an entire economy, is hard to define.
Indeed, competitiveness, like love or democracy, actually has several meanings. And
the question "Is America competitive?" has at least three interpretations: How well is
the United States performing compared to other countries? How well has America
performed in international trade? Are we doing the best we can?...
... productivity growth in the United States has been slower than productivity growth
elsewhere since then. As a result, foreign living standards and productivity levels are
catching up with those of the United States....

Incentives
Compound Interest
Opportunity Cost
Risk and Return
Insurance
Insurance, from the Concise Encyclopedia of Economics
Insurance plays a central role in the functioning of modern economies. Life insurance
offers protection against the economic impact of an untimely death; health insurance
covers the sometimes extraordinary costs of medical care; and bank deposits are
insured by the federal government. In each case a small premium is paid by the
insured to receive benefits should an unlikely but high-cost event occur....
An understanding of insurance must begin with the concept of risk, or the variation in
possible outcomes of a situation. A's shipment of goods to Europe might arrive safely
or might be lost in transit. C may incur zero medical expenses in a good year, but if
she is struck by a car, they could be upward of $100,000. We cannot eliminate risk
from life, even at extraordinary expense. Paying extra for double-hulled tankers still
leaves oil spills possible. The only way to eliminate auto-related injuries is to
eliminate automobiles.
Thus, the effective response to risk combines two elements: efforts or expenditures to
lessen the risk, and the purchase of insurance against the risk that remains. Consider
A's shipment of, say, $1 million in goods....
Liability, from the Concise Encyclopedia of Economics
Until recently, property and liability insurance was a small cost of doing business. But
the substantial expansion in what legally constitutes liability over the past thirty years
has greatly increased the cost of liability insurance for personal injuries....
Decision Making and Cost-Benefit Analysis
Saving and Investing

Financial Markets
Stock Market, from the Concise Encyclopedia of Economics
The price of a share of stock, like that of any other financial asset, equals the present
value of the sum of the expected dividends or other cash payments to the
shareholders, where future payments are discounted by the interest rate and risks
involved. Most of the cash payments to stockholders arise from dividends, which are
paid out of earnings and other distributions resulting from the sale or liquidation of
assets....
Bonds, from the Concise Encyclopedia of Economics
Bond markets are important components of capital markets. Bonds are fixed-income
financial assetsessentially IOUs that promise the holder a specified set of payments.
The value of a bond, like the value of any other asset, is the present value of the
income stream one expects to receive from holding the bond....
The U.S. government is highly unlikely to default on promised payments to its
bondholders because the government has the right to tax as well as the authority to
print money. Thus, virtually all of the variation in the value of its bonds is due to
changes in market interest rates. That is why most securities analysts use prices of
U.S. government bonds to compute market interest rates.
Because the U.S. government's tax revenues rarely cover expenditures, it relies on
debt financing for the balance. Moreover, on the occasions when the government does
not have a budget deficit, it still sells new debt to refinance the old debt as it matures.
Most of the debt sold by the U.S. government is marketable, meaning that it can be
resold by its original purchaser. Marketable issues include treasury bills, treasury
notes, and treasury bonds. The major nonmarketable federal debt sold to individuals is
U.S. savings bonds.
Efficient Capital Markets, from the Concise Encyclopedia of Economics
The efficient markets theory (EMT) of financial economics states that the price of an
asset reflects all relevant information that is available about the intrinsic value of the
asset. Although the EMT applies to all types of financial securities, discussions of the
theory usually focus on one kind of security, namely, shares of common stock in a
company. A financial security represents a claim on future cash flows, and thus the
intrinsic value is the present value of the cash flows the owner of the security expects
to receive....
In economics the word "investment" does not mean buying stocks and bonds!
Investment, from the Concise Encyclopedia of Economics
By investment, economists mean the production of goods that will be used to produce
other goods. This definition differs from the popular usage, wherein decisions to
purchase stocks or bonds are thought of as investment.
Investment is usually the result of forgoing consumption. In a purely agrarian society,
early humans had to choose how much grain to eat after the harvest and how much to
save for future planting. The latter was investment. In a more modern society, we
allocate our productive capacity to producing pure consumer goods such as
hamburgers and hot dogs, and investment goods such as semiconductor foundries....

Technology
Innovation, from the Concise Encyclopedia of Economics
Innovation can turn new concepts into realities, creating wealth and power. For
example, someone who discovers a cure for a disease has the power to withhold it,
give it away, or sell it to others. Innovations can also disrupt the status quo, as when
the invention of the automobile eliminated the need for horse-powered
transportation....
Productive Resources
Human Capital
Markets and Prices
Entrepreneurs
Income Distribution
Economic Systems

Government and Economics

National
Standard

Key Concepts

Standard 16:
Role of
Government

Roles of Government
Budget Deficits and Public Debt
Government Debt and Deficits, from the Concise Encyclopedia of Economics
Government debt is the stock of outstanding IOUs issued by the government at any
time in the past and not yet repaid. Governments issue debt whenever they borrow
from the public; the magnitude of the outstanding debt equals the cumulative amount
of net borrowing that the government has done. The deficit is the addition in the
current period (year, quarter, month, etc.) to the outstanding debt. The deficit is
negative whenever the value of outstanding debt falls; a negative deficit is called a
surplus....
Budget Deficit, at Answers.com
Excess of spending over income for a government, corporation, or individual over a
particular period of time. A budget deficit accumulated by the federal government of
the United States must be financed by the issuance of Treasury Bonds. Corporate
deficits must be reduced or eliminated by increasing sales and reducing expenditures,
or the company will not survive in the long run. Similarly, individuals who
consistently spend more than they earn will accumulate huge debts, which may
ultimately force them to declare bankruptcy if the debt cannot be serviced. The
opposite of a deficit is a surplus.
Income Distribution
Competition and Market Structures
GDP
Gross Domestic Product (GDP), from the Concise Encyclopedia of Economics
For the United States, GDP replaces gross national product (GNP) as the main
measure of production. GDP measures the output of all labor and capital within the
U.S. geographical boundary regardless of the residence of that labor or owner of
capital. GNP measures the output supplied by residents of the United States regardless
of where they live and work or where they own capital. Conceptually, the GDP
measure emphasizes production in the United States, while GNP emphasizes U.S.
income resulting from production.
GDP is one measure, but not a perfect measure, of the well-being of the citizens of a
country. For example, homemaker income is not traded in markets, and so is not
included in GDP. (Because stay-at-home moms are not paid salaries, there are no
government records for how much output they produce for their families.) Economic
Indicators, from the Social Studies Help Center.
The Gross National Product (GNP) is a nation's total output of goods and services

produced BY a country in one year. In obtaining the value of the GNP, only the final
value of a product is counted (e.g. homes but not the construction materials they were
built with). The three major components of GNP are consumer purchases, government
spending, private investment and exports. The formula is thus:
C + G + I + X = GNP

... The fourth factor is the exclusion of non market activities. Non market activities are
those activities that do not take place in the market, and most of them are not
accounted for because of measurement problems. Such activities include services
people provide for themselves like home maintenance, and the service homemakers
provide.

Property Rights
Market Failures

Standard 17:
Using
Cost/Benefit
Analysis to
Evaluate
Government
Programs

Government Failures and Public Choice Analysis

Unintended Consequences, from the Concise Encyclopedia of Economics
The law of unintended consequences, often cited but rarely defined, is that actions of
peopleand especially of governmentalways have effects that are unanticipated or
"unintended." Economists and other social scientists have heeded its power for
centuries; for just as long, politicians and popular opinion have largely ignored it....
Most often, however, the law of unintended consequences illuminates the perverse
unanticipated effects of legislation and regulation. In 1692 John Locke, the English
philosopher and a forerunner of modern economists, urged the defeat of a
parliamentary bill designed to cut the maximum permissible rate of interest from 6
percent to 4 percent. Locke argued that instead of benefiting borrowers, as intended, it
would hurt them. People would find ways to circumvent the law, with the costs of
circumvention borne by borrowers. To the extent the law was obeyed, Locke
concluded, the chief results would be less available credit and a redistribution of
income away from "widows, orphans and all those who have their estates in money."
Public Choice Theory, from the Concise Encyclopedia of Economics
Public choice theory is a branch of economics that developed from the study of
taxation and public spending. It emerged in the fifties and received widespread public
attention in 1986, when James Buchanan, one of its two leading architects (the other
was his colleague Gordon Tullock), was awarded the Nobel Prize in economics....
Government Spending, from the Concise Encyclopedia of Economics
In the past, government spending increased during wars and then typically took some
time to fall back to its previous level. Because the effects of World War I were not
totally gone by 1929, the line for the United States from 1790 to 1929 has a very
slight upward slant. But in the second quarter of the twentieth century, government
spending began a rapid and steady increase. While economists and political scientists
have offered many theories about what determines the level of government spending,
there really is no known explanation for either part of this historical record....
Considering what governments spend money on may help. Government spending on
so-called public goods, national defense and police, for example, is sometimes
blamed.
It is frequently asserted that the government spends much in helping the poor.
Although the government does do so, the bulk of all transfer payments go to people
who are relatively well off.
Economists trying to explain government spending have recently attributed it to
special interest coalitions lobbying the government to transfer wealth to them. The
term economists use to describe such lobbying is "rent-seeking."
Political Behavior, from the Concise Encyclopedia of Economics
Political activity, however, is startlingly different from voluntary exchange in markets.
In a democracy groups can accomplish many things in politics that they could not in

the private sector. Some of these are vital to the broader community's welfare, such as
control of health-threatening air pollution from myriad sources affecting millions of
individuals, or the provision of national defense. Other public-sector actions provide
narrow benefits that fall far short of their costs....

Rent Seeking, by David R. Henderson, from the Concise

Encyclopedia of Economics
"Rent seeking" is one of the most important insights in the
last fifty years of economics and, unfortunately, one of the
most inappropriately labeled. Gordon Tullock originated the
idea in 1967, and Anne Krueger introduced the label in 1974.
The idea is simple but powerful. People are said to seek rents
when they try to obtain benefits for themselves through the
political arena. They typically do so by getting a subsidy for a
good they produce or for being in a particular class of
people, by getting a tariff on a good they produce, or by
getting a special regulation that hampers their competitors.
Elderly people, for example, often seek higher social security
payments; steel producers often seek restrictions on imports
of steel; and licensed electricians and doctors often lobby to
keep regulations in place that restrict competition from
unlicensed electricians or doctors.

Rent seeking is one of the most important insights in the last fifty years of economics
and, unfortunately, one of the most inappropriately labeled. Gordon Tullock
originated the idea in 1967, and Anne Krueger introduced the label in 1974. The idea
is simple but powerful. People are said to seek rents when they try to obtain benefits
for themselves through the political arena. They typically do so by getting a subsidy
for a good they produce or for being in a particular class of people, by getting a tariff
on a good they produce, or by getting a special regulation that hampers their
competitors. Elderly people, for example, often seek higher Social Security payments;
steel producers often seek restrictions on imports of steel; and licensed electricians
and doctors often lobby to keep regulations in place that restrict competition from
unlicensed electricians or doctors.

Barriers to Trade
Decision Making and Cost-Benefit Analysis
Standard 18:
Macroeconom
y
Income/Emplo
yment, Prices

GDP

Standard 19:
Unemploymen
t and Inflation

Business Cycles

Real vs. Nominal

Business Cycles, from the Concise Encyclopedia of Economics

The United States and all other modern industrial economies experience significant
swings in economic activity. In some years most industries are booming and
unemployment is low; in other years most industries are operating well below
capacity and unemployment is high. Periods of economic expansion are typically
called booms; periods of economic decline are called recessions or depressions. The
combination of booms and recessions, the ebb and flow of economic activity, is called
the business cycle....
Recessions, from the Concise Encyclopedia of Economics
One of the most popular definitions of recessions is that they are periods when real
gross national product (GNP) has declined for at least two consecutive quarters. In
1990, real GNP declined between the third and fourth quarters and again between the
fourth quarter of 1990 and the first quarter of 1991. Hence, there is general agreement
that a recession did occur....
Great Depression, from the Concise Encyclopedia of Economics
A worldwide depression struck countries with market economies at the end of the
1920s. Although the Great Depression was relatively mild in some countries, it was
severe in others, particularly in the United States, where, at its nadir in 1933, 25
percent of all workers and 37 percent of all nonfarm workers were completely out of
work. Some people starved; many others lost their farms and homes. Homeless
vagabonds sneaked aboard the freight trains that crossed the nation. Dispossessed
cotton farmers, the "Okies," stuffed their possessions into dilapidated Model Ts and
migrated to California in the false hope that the posters about plentiful jobs were true.
Although the U.S. economy began to recover in the second quarter of 1933, the
recovery largely stalled for most of 1934 and 1935....
Bubbles, from the Concise Encyclopedia of Economics
What Are Bubbles? In 1996, the fledgling portal Yahoo.com made its stock-market
debut. This was during a time of great excitement--as well as uncertainty--about the
prosperous "new economy" that the rapidly expanding Internet promised. By the
beginning of the year 2000, Yahoo shares were trading at $240 each. Exactly one year
later, however, Yahoo's stock sold for only $30 per share....

Employment and Unemployment

Inflation
Standard 20:
Monetary and
Fiscal Policy

Inflation
Monetary Policy and the Federal Reserve
Budget Deficits and Public Debt
Fiscal Policy
Fiscal Policy, from the Concise Encyclopedia of Economics
Fiscal policy is the use of government spending and taxation to influence the
economy. When the government decides on the goods and services it purchases, the
transfer payments it distributes, or the taxes it collects, it is engaging in fiscal policy.
The primary economic impact of any change in the government budget is felt by
particular groups--a tax cut for families with children, for example, raises their
disposable income. Discussions of fiscal policy, however, generally focus on the
effect of changes in the government budget on the overall economy. Although changes
in taxes or spending that are "revenue neutral" may be construed as fiscal policy--and
may affect the aggregate level of output by changing the incentives that firms or
individuals face--the term "fiscal policy" is usually used to describe the effect on the
aggregate economy of the overall levels of spending and taxation, and more
particularly, the gap between them.
Fiscal policy is said to be tight or contractionary when revenue is higher than
spending (i.e., the government budget is in surplus) and loose or expansionary when
spending is higher than revenue (i.e., the budget is in deficit). Often, the focus is not
on the level of the deficit, but on the change in the deficit. Thus, a reduction of the
deficit from $200 billion to $100 billion is said to be contractionary fiscal policy, even
though the budget is still in deficit....
New Keynesian Economics, from the Concise Encyclopedia of Economics
Because new Keynesian economics is a school of thought regarding macroeconomic
theory, its adherents do not necessarily share a single view about economic policy. At
the broadest level, new Keynesian economics suggests--in contrast to some new
classical theories--that recessions are departures from the normal efficient functioning
of markets. The elements of new Keynesian economics--such as menu costs,
staggered prices, coordination failures, and efficiency wages--represent substantial
deviations from the assumptions of classical economics, which provides the
intellectual basis for economists' usual justification of laissez-faire. In new Keynesian
theories recessions are caused by some economy-wide market failure. Thus, new
Keynesian economics provides a rationale for government intervention in the
economy, such as countercyclical monetary or fiscal policy....