How the U.S. Economy Works

The U.S. Economy:
A Brief History

Small Business and the Corporation

Stocks, Commodities, and Markets

The Role of the Government in the Economy

Monetary and Fiscal Policy

American Agriculture:
Its Changing Significance

Labor in America:
The Worker's Role

Foreign Trade and Global Economic Policies

Afterword:
Beyond Economics

Glossary

  Glossary of
      Economic Terms

American Stock Exchange: One of the key stock exchanges in the United States, it consists mainly of stocks and bonds of companies that are small to medium-sized, compared with the shares of large corporations traded on the New York Stock Exchange.

Antitrust law: A policy or action that seeks to curtail monopolistic powers within a market.

Asset: A possession of value, usually measured in terms of money.

Balance of payments: An accounting statement of the money value of international transactions between one nation and the rest of the world over a specific period of time. The statement shows the sum of transactions of individuals, businesses, and government agencies located in one nation, against those of all other nations.

Balance of trade: That part of a nation's balance of payments dealing with imports and exports -- that is, trade in goods and services -- over a given period. If exports of goods exceed imports, the trade balance is said to be "favorable"; if imports exceed exports, the trade balance is said to be "unfavorable."

Bear market: A market in which, in a time of falling prices, shareholders may rush to sell their stock shares, adding to the downward momentum.

Bond: A certificate reflecting a firm's promise to pay the holder a periodic interest payment until the date of maturity and a fixed sum of money on the designated maturing date.

Budget deficit: The amount each year by which government spending is greater than government income.

Budget surplus: The amount each year by which government income exceeds government spending.

Bull market: A market in which there is a continuous rise in stock prices.

Capital: The physical equipment (buildings, equipment, human skills) used in the production of goods and services. Also used to refer to corporate equity, debt securities, and cash.

Capitalism: An economic system in which the means of production are privately owned and controlled and which is characterized by competition and the profit motive.

Capital market: The market in which corporate equity and longer-term debt securities (those maturing in more than one year) are issued and traded.

Central bank: A country's principal monetary authority, responsible for such key functions as issuing currency and regulating the supply of credit in the economy.

Commercial bank: A bank that offers a broad range of deposit accounts, including checking, savings, and time deposits, and extends loans to individuals and businesses -- in contrast to investment banking firms such as brokerage firms, which generally are involved in arranging for the sale of corporate or municipal securities.

Common market: A group of nations that have eliminated tariffs and sometimes other barriers that impede trade with each other while maintaining a common external tariff on goods imported from outside the union.

Common stock: A share in the ownership of a corporation.

Consumer price index: A measure of the U.S. cost of living as tabulated by the U.S. Bureau of Labor Statistics based on the actual retail prices of a variety of consumer goods and services at a given time and compared to a base period that is changed from time to time.

Consumption tax: A tax on expenditures, rather than on earnings.

Deficiency payment: A government payment to compensate farmers for all or part of the difference between producer prices actually paid for a specific commodity and higher guaranteed target prices.

Demand: The total quantity of goods and services consumers are willing and able to buy at all possible prices during some time period.

Depression: A severe decline in general economic activity in terms of magnitude and/or length.

Deposit insurance: U.S. government backing of bank deposits up to a certain amount -- currently, $100,000.

Deregulation: Lifting of government controls over an industry.

Discount rate: The interest rate paid by commercial banks to borrow funds from Federal Reserve Banks.

Dividend: Money earned on stock holdings; usually, it represents a share of profits paid in proportion to the share of ownership.

Dow Jones Industrial Average: A stock price index, based on 30 prominent stocks, that is a commonly used indicator of general trends in the prices of stocks and bonds in the United States.

Dumping: Under U.S. law, sales or merchandise exported to the United States at "less than fair market value," when such sales materially injure or threaten material injury to producers of like merchandise in the United States.

Economic growth: An increase in a nation's capacity to produce goods and services.

Electronic commerce: Business conducted via the World Wide Web.

Exchange rate: The rate, or price, at which one country's currency is exchanged for the currency of another country.

Exports: Goods and services that are produced domestically and sold to buyers in another country.

Export subsidy: A lump sum given by the government for the purpose of promoting an enterprise considered beneficial to the public welfare.

Fast track: Procedures enacted by the U.S. Congress under which it votes within a fixed period on legislation submitted by the president to approve and implement U.S. international trade agreements.

Federal Reserve Bank: One of the 12 operating arms of the Federal Reserve System, located throughout the United States, that together with their 25 branches carry out various functions of the U.S. central bank system.

Federal Reserve System: The principal monetary authority (central bank) of the United States, which issues currency and regulates the supply of credit in the economy. It is made up of a seven-member Board of Governors in Washington, D.C., 12 regional Federal Reserve Banks, and their 25 branches.

Fiscal policy: The federal government's decisions about the amount of money it spends and collects in taxes to achieve full employment and non-inflationary economy.

Fixed exchange rate system: A system in which exchange rates between currencies are set at a predetermined level and do not move in response to changes in supply and demand.

Floating exchange rate system: A flexible system in which the exchange rate is determined by market forces of supply and demand, without intervention.

Food for Peace: A program that provides for the disposition of U.S. farm products outside the United States.

Free enterprise system: An economic system characterized by private ownership of property and productive resources, the profit motive to stimulate production, competition to ensure efficiency, and the forces of supply and demand to direct the production and distribution of goods and services.

Free trade: The absence of tariffs and regulations designed to curtail or prevent trade among nations.

Fringe benefit: An indirect, non-cash benefit provided to employees by employers in addition to regular wage or salary compensation, such as health insurance, life insurance, profit-sharing, and the like.

Futures: Contracts that require delivery of a commodity of specified quality and quantity, at a specified price, on a specified future date.

Gold standard: A monetary system in which currencies are defined in terms of a given weight of gold.

Gross domestic product: The total value of a nation's output, income, or expenditure produced within its physical boundaries.

Human capital: The health, strength, education, training, and skills that people bring to their jobs.

Imports: Goods or service that are produced in another country and sold domestically.

Income tax: An assessment levied by government on the net income of individuals and businesses.

Industrial Revolution: The emergence of the factory system of production, in which workers were brought together in one plant and supplied with tools, machines, and materials with which they worked in return for wages. The Industrial Revolution was spearheaded by rapid changes in the manufacture of textiles, particularly in England about 1770 and 1830. More broadly, the term applies to continuing structural economic change in the world economy.

Inflation: A rate of increase in the general price level of all goods and services. (This should not be confused with increases in the prices of specific goods relative to the prices of other goods.)

Intellectual property: Ownership, as evidenced by patents, trademarks, and copyrights, conferring the right to possess, use, or dispose of products created by human ingenuity.

Investment: The purchase of a security, such as a stock or bond.

Labor force: As measured in the United States, the total number of people employed or looking for work.

Laissez-faire: French phrase meaning "leave alone." In economics and politics, a doctrine that the economic system functions best when there is no interference by government.

Managed float regime: An exchange rate system in which rates for most currencies float, but central banks still intervene to prevent sharp changes.

Market: A setting in which buyers and sellers establish prices for identical or very similar products, and exchange goods or services.

Market economy: The national economy of a country that relies on market forces to determine levels of production, consumption, investment, and savings without government intervention.

Mixed economy: An economic system in which both the government and private enterprise play important roles with regard to production, consumption, investment, and savings.

Monetary policy: Federal Reserve System actions to influence the availability and cost of money and credit as a means of helping to promote high employment, economic growth, price stability, and a sustainable pattern of international transactions.

Money supply: The amount of money (coins, paper currency, and checking accounts) that is in circulation in the economy.

Monopoly: The sole seller of a good or service in a market.

Mutual fund: An investment company that continually offers new shares and buys existing shares back on demand and uses its capital to invest in diversified securities of other companies. Money is collected from individuals and invested on their behalf in varied portfolios of stocks.

National Association of Securities Dealers Automated Quotation system (Nasdaq): An automated information network that provides brokers and dealers with price quotations on the approximately 5,000 most active securities traded over the counter.

New Deal: U.S. economic reform programs of the 1930s established to help lift the United States out of the Great Depression.

New York Stock Exchange: The world's largest exchange for trading stocks and bonds.

Nontariff barrier: Government measures, such as import monitoring systems and variable levies, other than tariffs that restrict imports or that have the potential for restricting international trade.

Open trading system: A trading system in which countries allow fair and nondiscriminatory access to each other's markets.

Over-the-counter: Figurative term for the means of trading securities that are not listed on an organized stock exchange such as the New York Stock Exchange. Over-the-counter trading is done by broker-dealers who communicate by telephone and computer networks.

Panic: A series of unexpected cash withdrawals from a bank caused by a sudden decline in depositor confidence or fear that the bank will be closed by the chartering agency, i.e. many depositors withdraw cash almost simultaneously. Since the cash reserve a bank keeps on hand is only a small fraction of its deposits, a large number of withdrawals in a short period of time can deplete available cash and force the bank to close and possibly go out of business.

Price discrimination: Actions that give certain buyers advantages over others.

Price fixing: Actions, generally by a several large corporations that dominate in a single market, to escape market discipline by setting prices for goods or services at an agreed-on level.

Price supports: Federal assistance provided to farmers to help them deal with such unfavorable factors as bad weather and overproduction.

Privatization: The act of turning previously government-provided services over to private sector enterprises.

Productivity: The ratio of output (goods and services) produced per unit of input (productive resources) over some period of time.

Protectionism: The deliberate use or encouragement of restrictions on imports to enable relatively inefficient domestic producers to compete successfully with foreign producers.

Recession: A significant decline in general economic activity extending over a period of time.

Regulation: The formulation and issuance by authorized agencies of specific rules or regulations, under governing law, for the conduct and structure of a certain industry or activity.

Revenue: Payments received by businesses from selling goods and services.

Securities: Paper certificates (definitive securities) or electronic records (book-entry securities) evidencing ownership of equity (stocks) or debt obligations (bonds).

Securities and Exchange Commission: An independent, non-partisan, quasi-judicial regulatory agency with responsibility for administering the federal securities laws. The purpose of these laws is to protect investors and to ensure that they have access to disclosure of all material information concerning publicly traded securities. The commission also regulates firms engaged in the purchase or sale of securities, people who provide investment advice, and investment companies.

Services: Economic activities -- such as transportation, banking, insurance, tourism, telecommunications, advertising, entertainment, data processing, and consulting -- that normally are consumed as they are produced, as contrasted with economic goods, which are more tangible.

Socialism: An economic system in which the basic means of production are primarily owned and controlled collectively, usually by government under some system of central planning.

Social regulation: Government-imposed restrictions designed to discourage or prohibit harmful corporate behavior (such as polluting the environment or putting workers in dangerous work situations) or to encourage behavior deemed socially desirable.

Social Security: A U.S. government pension program that provides benefits to retirees based on their own and their employers' contributions to the program while they were working.

Standard of living: A minimum of necessities, comforts, or luxuries considered essential to maintaining a person or group in customary or proper status or circumstances.

Stagflation: An economic condition of both continuing inflation and stagnant business activity.

Stock: Ownership shares in the assets of a corporation.

Stock exchange: An organized market for the buying and selling of stocks and bonds.

Subsidy: An economic benefit, direct or indirect, granted by a government to domestic producers of goods or services, often to strengthen their competitive position against foreign companies.

Supply: A schedule of how much producers are willing and able to sell at all possible prices during some time period.

Tariff: A duty levied on goods transported from one customs area to another either for protective or revenue purposes.

Trade deficit: The amount by which a country's merchandise exports exceed its merchandise imports.

Trade surplus: The amount by which a country's merchandise exports exceed its imports.

Venture capital: Investment in a new, generally possibly risky, enterprise.