Basic terms in Economics

Terms	Meaning
Inflation	A general rise in price level of all goods and services within a period of time
Demand	Consumer's desire to purchase a good or service backed by ability and willingness to pay.
Price	It is a amount of money in which a supplier is willing to offer a product and a buyer is willing to pay.
Economic growth	Economic growth is the growth in inflation-adjusted gross domestic product within a period of time.
Money supply	The total amount of money in circulation or in existence in a country.
Monetary policy	Policy by Central Bank to achieve price stability, interest rate stability, and exchange rate stability through the control of money supply.
Microeconomics	The part of economics concerned with single factors and the effects of individual decisions.
Quantity theory of money	Theory that advocates that as the money in circulation increases, the price level also increases proportionately, and the value of money falls.
Crony capitalism	An economic system characterized by close, mutually advantageous relationships between business leaders and government officials.
Currency attack	A speculative attack in the foreign exchange market is the massive and sudden selling of a nation's currency, and can be carried out by both domestic and foreign investors.
Pegged exchange rate	A pegged exchange rate, also known as a fixed exchange rate, is where the currency of one country is tied to a usually stronger currency, such as the euro, US dollar or pound sterling.
Pump Priming	Pump priming is the action taken to stimulate an economy, usually during a recessionary period, through government spending and interest rate and tax reductions.
Compensatory spending	Compensatory spending refers to government expenditure which is undertaken with the idea of compensating the decline in private investment.
New classical macroeconomics	New classical macroeconomics, sometimes simply called new classical economics, is a school of thought in macroeconomics that builds its analysis entirely on a neoclassical framework. Specifically, it emphasizes the importance of rigorous foundations based on microeconomics, especially rational expectations.
Aggregate Demand	Aggregate demand is the total demand for goods and services within a particular market.
Aggregate Supply	Aggregate supply is the total supply of goods and services that firms in a national economy plan on selling during a specific time period.
Business Cycle	The business cycle refers to the fluctuations in economic activity that an economy experiences over time, typically involving periods of expansion and contraction.
GDP (Gross Domestic Product)	GDP is the monetary value of all finished goods and services produced within a country's borders in a specific time period.
Unemployment Rate	The unemployment rate is the percentage of the labor force that is jobless and actively seeking employment.
Inflation	Inflation is the rate at which the general level of prices for goods and services is rising.
Deflation	Deflation is a decrease in the general price level of goods and services.
Stagflation	Stagflation is a situation in which the inflation rate is high, the economic growth rate slows, and unemployment remains steadily high.
Phillips Curve	The Phillips Curve illustrates the inverse relationship between rates of unemployment and corresponding rates of inflation.
NAIRU	NAIRU stands for Non-Accelerating Inflation Rate of Unemployment, the specific level of unemployment that exists in an economy that does not cause inflation to increase.
Central Bank	A central bank is a national bank that provides financial and banking services for a country's government and commercial banking system, and implements monetary policy.
Interest Rate	An interest rate is the amount a lender charges a borrower and is a percentage of the principal.
Money Supply	Money supply is the total amount of monetary assets available in an economy at a specific time.
Open Market Operations	These are activities by a central bank to buy or sell government bonds on the open market to regulate the supply of money.
Reserve Requirement	The reserve requirement is the minimum amount of reserves that must be held by a commercial bank.
Quantitative Easing	Quantitative easing is a monetary policy where a central bank purchases longer-term securities to increase the money supply and encourage lending and investment.
Liquidity Trap	A liquidity trap occurs when interest rates are low and savings rates are high, rendering monetary policy ineffective.
Monetary Base	The monetary base is the total amount of a currency in circulation or in commercial bank deposits in the central bank.
Nominal Interest Rate	The nominal interest rate is the interest rate before taking inflation into account.
Real Interest Rate	The real interest rate is the interest rate that has been adjusted to remove the effects of inflation.
Exchange Rate	An exchange rate is the value of one currency for the purpose of conversion to another.
Trade Balance	The trade balance is the difference between a country's exports and imports of goods.
Current Account	The current account records a nation’s transactions with the rest of the world – specifically its net trade in goods and services.
Capital Account	The capital account records net changes in ownership of national assets.
Foreign Direct Investment (FDI)	FDI is an investment made by a firm or individual in one country into business interests located in another country.
Tariff	A tariff is a tax imposed on imported goods and services.
Quota	A quota is a government-imposed trade restriction that limits the number or monetary value of goods that can be imported or exported during a particular time period.
Comparative Advantage	Comparative advantage is an economy's ability to produce a particular good or service at a lower opportunity cost than its trading partners.
Absolute Advantage	Absolute advantage refers to the ability of a party to produce more of a good or service than competitors using the same amount of resources.
Terms of Trade	Terms of trade refers to the rate at which one good is exchanged for another between countries.
Balance of Trade	Balance of trade is the difference in value between a country’s imports and exports of goods.
Exchange Rate Regime	An exchange rate regime is the way an authority manages its currency in relation to other currencies and the foreign exchange market.
Fixed Exchange Rate	A fixed exchange rate is a regime where the value of a currency is tied or pegged to another major currency.
Floating Exchange Rate	A floating exchange rate is determined by the private market through supply and demand.
Devaluation	Devaluation is a reduction in the value of a country’s currency with respect to other currencies.
Revaluation	Revaluation is an increase in the value of a currency in a fixed exchange rate system.
Currency Peg	A currency peg is a policy in which a country maintains its currency's value at a fixed exchange rate to another currency.
Trade Deficit	A trade deficit occurs when a country's imports exceed its exports.
Trade Surplus	A trade surplus occurs when a country's exports exceed its imports.
World Trade Organization (WTO)	The WTO is an intergovernmental organization that regulates international trade.
International Monetary Fund (IMF)	The IMF is an international financial institution that offers monetary cooperation and financial stability and provides policy advice and financing to its members in economic difficulties.
World Bank	The World Bank is an international financial institution that provides loans and grants to the governments of poorer countries for the purpose of pursuing capital projects.
Crowding Out	Crowding out is a situation where increased government spending leads to a reduction in private sector investment due to rising interest rates.
Crowding In	Crowding in occurs when government spending leads to increased private sector investment, often in a recession.
Keynesian Economics	Keynesian economics advocates for active government intervention in the economy, especially during recessions.
Classical Economics	Classical economics emphasizes free markets, limited government intervention, and the idea that markets are self-correcting.
Automatic Stabilizers	Automatic stabilizers are economic policies and programs that offset fluctuations in a nation's economic activity without intervention by the government or policymakers.
Fiscal Policy	Fiscal policy involves government spending and taxation decisions to influence the economy.
Expansionary Fiscal Policy	Expansionary fiscal policy is used to stimulate the economy through increased government spending or tax cuts.
Contractionary Fiscal Policy	Contractionary fiscal policy is used to reduce inflation by decreasing government spending or increasing taxes.
Marginal Propensity to Consume (MPC)	MPC is the fraction of additional income that a household spends on consumption.
Marginal Propensity to Save (MPS)	MPS is the fraction of additional income that a household saves.
Tax Multiplier	The tax multiplier measures the effect of a change in taxes on the overall economic output.
Government Spending Multiplier	The government spending multiplier measures the effect of increased government spending on aggregate demand.
Potential Output	Potential output is the level of output an economy can produce at full employment.
Output Gap	The output gap is the difference between actual and potential output in the economy.
Okun’s Law	Okun's Law describes a relationship between unemployment and economic growth.
Real GDP	Real GDP is the total value of all goods and services produced adjusted for inflation.
Nominal GDP	Nominal GDP is the total value of all goods and services produced at current market prices.
Base Year	The base year is a reference year used for comparison in economic data such as GDP.
Index Number	An index number measures the change in a variable or group of variables over time.
Consumer Price Index (CPI)	CPI measures the average change in prices paid by consumers for a basket of goods and services.
Producer Price Index (PPI)	PPI measures the average change in selling prices received by domestic producers for their output.
Core Inflation	Core inflation excludes volatile items such as food and energy to measure the underlying inflation trend.
Cost-Push Inflation	Cost-push inflation is caused by rising production costs which increase prices.
Demand-Pull Inflation	Demand-pull inflation occurs when aggregate demand exceeds aggregate supply.
Hyperinflation	Hyperinflation is extremely rapid or out of control inflation.
Disinflation	Disinflation is a decrease in the rate of inflation – prices are still rising, but more slowly.
Recession	A recession is a significant decline in economic activity spread across the economy lasting more than a few months.
Depression	A depression is a prolonged and severe recession.
Unemployment	Unemployment is the condition of being without a job despite being willing and able to work.
Structural Unemployment	Structural unemployment results from industrial reorganization, typically due to technological change.
Cyclical Unemployment	Cyclical unemployment is caused by a downturn in the business cycle.
Frictional Unemployment	Frictional unemployment occurs when workers are between jobs or entering the labor market.
Natural Rate of Unemployment	The natural rate of unemployment is the long-term unemployment rate that is expected in a healthy economy.
Participation Rate	The labor force participation rate is the percentage of the working-age population that is working or seeking work.
Monetary Transmission Mechanism	The process through which monetary policy decisions affect the economy, especially output and inflation.
Fisher Effect	The Fisher effect describes the relationship between nominal interest rates and inflation.
Velocity of Money	The velocity of money is the rate at which money is exchanged in the economy.
M1 and M2	M1 includes physical currency and checkable deposits, while M2 adds savings deposits and money market securities.
Neutrality of Money	Neutrality of money is the idea that changes in the money supply only affect nominal variables in the long run.	Seigniorage	Seigniorage is the profit made by a government by issuing currency, especially the difference between the face value and production cost.	Time Inconsistency Problem	A situation in which a policy that is optimal today may not be optimal in the future, causing credibility issues.	Inflation Targeting	A monetary policy where the central bank sets an explicit inflation rate as the goal of monetary policy.	Taylor Rule	The Taylor Rule is a formula that central banks use to set interest rates based on inflation and output gap.	Forward Guidance	Forward guidance is communication by a central bank about the future path of monetary policy.	Monetary Neutrality	The theory that in the long run, changes in the money supply only affect prices and not real variables.	Moral Hazard	Moral hazard occurs when one party takes more risks because they do not bear the full consequences.	Trilemma (Impossible Trinity)	The trilemma states that a country cannot simultaneously have free capital movement, a fixed exchange rate, and an independent monetary policy.	Terms of Trade Shock	A terms of trade shock occurs when there is a sudden change in the prices of exports relative to imports.	J-Curve Effect	The J-curve effect describes the initial worsening and subsequent improvement in a country's trade balance after depreciation.	Marshall-Lerner Condition	A condition stating that a currency devaluation will only improve the trade balance if the sum of price elasticities of exports and imports is greater than one.	Capital Flight	Capital flight is the large-scale exit of financial assets and capital from a nation due to economic or political instability.	Speculative Attack	A speculative attack is a large-scale selling of a country's currency, betting on a future devaluation.	Special Drawing Rights (SDRs)	SDRs are international reserve assets created by the IMF to supplement member countries' reserves.	Twin Deficits Hypothesis	The twin deficits hypothesis suggests a link between a country’s fiscal deficit and its current account deficit.	Dutch Disease	Dutch Disease is an economic condition where a resource boom appreciates the currency and harms manufacturing exports.	Balance of Payments Crisis	A balance of payments crisis occurs when a country cannot meet its international payment obligations.	Current Account Deficit	A current account deficit occurs when a country's total imports of goods, services, and transfers exceed its exports.	Capital Controls	Capital controls are measures taken by a government to regulate flows of foreign capital in and out of the domestic economy.	Exchange Rate Pass-Through	Exchange rate pass-through measures how much of a currency's exchange rate changes affect domestic prices.	Nominal Anchor	A nominal anchor is a variable such as inflation or exchange rate used by monetary authorities to tie down price expectations.	Sovereign Debt	Sovereign debt is the money borrowed by a country’s government from domestic or international sources.	Default Risk	Default risk is the risk that a borrower will not pay back a loan or meet its debt obligations.	Currency Crisis	A currency crisis occurs when a speculative attack leads to a sharp depreciation or devaluation of a currency.	Hot Money	Hot money refers to capital that investors move between economies to profit from short-term interest or exchange rate differences.	Real Exchange Rate	The real exchange rate adjusts the nominal exchange rate for differences in price levels between countries.	Nominal Exchange Rate	The nominal exchange rate is the rate at which one currency can be exchanged for another.	Effective Exchange Rate	The effective exchange rate is a weighted average of a country’s currency relative to a basket of other major currencies.	Managed Float	A managed float is a system where exchange rates are allowed to fluctuate, but central banks intervene to stabilize them.	Currency Board	A currency board is a fixed exchange rate regime where a country backs its currency with foreign reserves.	Specialization	Specialization is when a country focuses on producing goods where it has a comparative advantage.	Gains from Trade	Gains from trade refer to the net benefits to countries from opening up to international trade.	Trade Liberalization	Trade liberalization involves reducing or eliminating barriers to trade like tariffs and quotas.	Infant Industry Argument	The infant industry argument supports protecting new industries until they become competitive internationally.	Export-Led Growth	Export-led growth is a strategy where countries boost economic growth through increased exports.	Import Substitution	Import substitution is a policy aimed at replacing foreign imports with domestic production.	Terms of Trade Index	The terms of trade index measures the ratio of export prices to import prices.	Tariff Escalation	Tariff escalation refers to higher tariffs on processed goods than on raw materials to encourage domestic processing.	Quota Rent	Quota rent is the economic rent received by the holder of an import license under a quota system.	Trade Diversion	Trade diversion occurs when trade shifts from a more efficient exporter to a less efficient one due to trade agreements.	Trade Creation	Trade creation is when new trade is generated between member countries of a trade agreement.	Regional Trade Agreement (RTA)	An RTA is a treaty between two or more governments that defines the rules of trade for all signatories.	Customs Union	A customs union is a group of countries that have a common external tariff and no internal tariffs.	Common Market	A common market is a customs union with free movement of goods, services, capital, and labor.	Economic Union	An economic union combines a common market with coordination of economic policies.	Monetary Union	A monetary union is a group of countries that share a common currency and central bank.	Trade Sanctions	Trade sanctions are penalties or restrictions on trade with a country to influence its behavior.	Non-Tariff Barriers	Non-tariff barriers are regulations or requirements other than tariffs that restrict imports or exports.	Voluntary Export Restraint (VER)	A VER is a self-imposed restriction by an exporting country on the volume of its exports.	Export Subsidy	An export subsidy is a government policy to encourage export of goods by offering financial assistance.	Import Licensing	Import licensing is the requirement for authorization to import specific goods into a country.	Trade War	A trade war is a situation where countries impose tariffs or restrictions on each other in retaliation.	Adjustment Costs	Adjustment costs are the economic costs incurred when resources move between industries due to trade or policy change.	Factor Price Equalization	This theorem suggests that free trade will equalize wages and returns on capital across countries.	Heckscher-Ohlin Model	A model explaining trade patterns based on countries' factor endowments (labor, land, capital).	Stolper-Samuelson Theorem	This theorem predicts that trade benefits the abundant factor and harms the scarce factor in each country.	Rybczynski Theorem	A theory stating that an increase in one factor endowment increases output in the industry using that factor intensively.	Linder Hypothesis	The Linder Hypothesis suggests that countries with similar demand structures are more likely to trade with each other.	Product Cycle Theory	This theory explains trade patterns based on the life cycle of a product from innovation to standardization.	Economies of Scale	Economies of scale occur when the average cost of production falls as output increases.	Intra-Industry Trade	Intra-industry trade refers to the exchange of similar products belonging to the same industry.	Gravity Model of Trade	This model predicts bilateral trade flows based on countries' economic size and distance between them.	Terms of Trade Deterioration	This occurs when export prices fall relative to import prices, reducing national income.	Foreign Exchange Reserves	These are assets held by central banks in foreign currencies used to back liabilities and influence exchange rates.	Trade Protectionism	Trade protectionism is the use of barriers to shield domestic industries from foreign competition.	Structural Adjustment Program (SAP)	These are economic policies imposed by the IMF/World Bank to promote market efficiency and reduce fiscal deficits.	Ricardian equivalence	The proposition that when a government finances spending with debt rather than taxes, rational households foresee higher future taxes and therefore increase saving enough to leave aggregate demand—and interest rates—unchanged, rendering fiscal deficits neutral in the long run.	Real business-cycle (RBC) theory	A school of macroeconomics that explains fluctuations in output and employment as optimal responses to real (supply-side) technology shocks, assuming perfectly competitive markets, flexible wages and prices, and rational expectations.	Sticky prices	The notion that product prices adjust sluggishly to changes in supply or demand, often because of menu costs, contracts, or coordination failure, causing short-run non-neutrality of monetary policy.	Rational expectations	The assumption that economic agents use all available information and the true economic model to form forecasts, so on average they do not make systematic errors.	Adaptive expectations	A forecasting rule in which agents update their expectations of future variables (such as inflation) based on past forecast errors, giving more weight to recent observations.	Monetarism	A macroeconomic perspective, associated with Milton Friedman, that emphasizes the long-run proportional relationship between money growth and inflation and advocates steady, rule-based monetary expansion.	Quantity theory of money	The theory summarized by MV = PY, stating that, with velocity (V) and real output (Y) relatively stable, changes in the money supply (M) lead to proportional changes in the price level (P).	Fiscal dominance	A regime in which fiscal needs override price-stability objectives, forcing the central bank to monetize government deficits, thereby undermining independent monetary policy.	Monetary dominance	The opposite regime: the central bank sets policy to achieve price stability, and the fiscal authority adjusts spending or taxation to maintain debt sustainability without pressuring the central bank to finance deficits.	Helicopter money	A hypothetical and highly expansionary policy where the central bank creates money and transfers it directly to households (or finances permanent fiscal transfers), bypassing conventional banking channels.	Yield-curve control (YCC)	A policy, notably used by the Bank of Japan, in which the central bank commits to buy or sell government bonds at whatever scale is necessary to keep longer-term interest rates near a target level.	Macroprudential policy	Regulatory measures aimed at safeguarding the stability of the financial system as a whole—e.g., counter-cyclical capital buffers, loan-to-value ceilings—rather than focusing on individual institutions alone.	Basel III	The post-crisis global regulatory framework that tightened bank capital, liquidity, and leverage rules to reduce systemic risk, phased in starting 2013.	Capital adequacy ratio (CAR)	The ratio of a bank’s regulatory capital to its risk-weighted assets; higher CARs indicate greater loss-absorbing capacity.	Lender of last resort	The role of a central bank (or other authority) in providing liquidity to solvent but illiquid financial institutions to prevent panic and contagion.	Deposit insurance	A guarantee, typically backed by government, that small depositors will be repaid even if their bank fails, designed to deter bank runs.	Credit crunch	A sudden tightening of lending standards and reduction in credit supply, often following a financial shock, which can amplify recessions.	Shadow banking	Credit-intermediation activities performed outside the regulated banking sector—e.g., money-market funds, securitization vehicles—often with maturity or liquidity transformation but without deposit insurance.	Financial contagion	The rapid spread of market disturbances—such as bank runs or asset sell-offs—from one country or institution to others, beyond what fundamentals alone would justify.	Macro stress testing	A forward-looking simulation in which regulators model how severe macroeconomic scenarios would impact banks’ capital and liquidity, identifying system-wide vulnerabilities.	Sovereign risk premium	The extra yield investors demand to hold a country’s debt relative to a risk-free benchmark, reflecting default probability, liquidity, and market sentiment.	Uncovered interest parity (UIP)	The condition that expected currency depreciation should equal the interest-rate differential between two countries; deviations imply potential carry-trade profits.	Covered interest parity (CIP)	The no-arbitrage condition that the forward exchange rate fully offsets interest-rate differentials, guaranteeing equal returns on hedged domestic and foreign deposits.	Forward-premium puzzle	The empirical finding that currencies with high interest rates often appreciate rather than depreciate, contradicting UIP and enabling profitable carry trades.	Carry trade	An investment strategy of borrowing in low-interest-rate currencies and investing in high-interest-rate currencies, profiting if exchange-rate movements do not offset the rate spread.	Currency mismatch	A situation where a borrower’s liabilities are denominated in foreign currency while its income is in domestic currency, creating balance-sheet vulnerability to depreciation.	Sudden stop	A sharp reversal of capital inflows into an economy, leading to external financing shortfalls, exchange-rate pressure, and often deep recessions.	Original sin	The inability of many emerging markets to borrow abroad in their own currency, forcing them to issue foreign-currency debt and heightening crisis risk.	Dollarization	The extensive use of a foreign currency (often the US dollar) in place of, or alongside, the domestic currency for transactions, saving, and pricing.	Optimal currency area (OCA)	A geographic region in which it would be economically efficient to share a single currency, given labor mobility, fiscal transfers, and synchronized business cycles.	Mundell–Fleming model	A short-run open-economy framework (IS-LM with capital flows) showing how fiscal and monetary policy effectiveness depends on exchange-rate regime and capital mobility.	Bretton Woods system	The 1944–1971 international monetary order with fixed but adjustable exchange rates, dollar-gold convertibility, and the creation of the IMF and World Bank.	SDR allocation	The IMF’s distribution of Special Drawing Rights—reserve assets whose value is based on a currency basket—to augment members’ official reserves.	Exchange-rate overshooting	Dornbusch’s result that, with sticky prices, a monetary shock causes the nominal exchange rate to jump beyond its long-run level, later reversing as prices adjust.	Debt overhang	A situation where a country’s or firm’s debt is so large that anticipated future taxes or profits accrue mainly to creditors, discouraging new investment.	Debt sustainability analysis (DSA)	A forward-looking assessment—used by the IMF, World Bank, and investors—of whether a sovereign can meet current and future debt-service obligations without adjustment or default.	Paris Club	An informal group of creditor governments that coordinate restructuring of official bilateral debt owed by distressed sovereigns.	London Club	A forum of commercial banks that negotiate rescheduling of private syndicated loans to sovereign borrowers in distress.	Sovereign credit rating	An assessment by agencies such as S&P, Moody’s, or Fitch of a government’s likelihood of default, influencing borrowing costs.	Tobin tax	A small levy on foreign-exchange transactions proposed by James Tobin to curb short-term speculative capital flows and enhance monetary autonomy.	Capital-account liberalization	The removal of controls on cross-border financial flows, allowing residents and foreigners to freely buy and sell assets; can spur investment but raises volatility.	Petrodollar recycling	The process by which oil-exporting countries invest surplus dollar revenues in global financial markets or lend them back to oil-importing countries.	Commodity money	Money that has intrinsic value (e.g., gold, silver) and can be consumed or used outside its monetary role.	Fiat money	Currency that has no intrinsic value but is declared legal tender by government decree and accepted by the public.	Inside money	Money created within the private sector—primarily bank deposits—backed by private assets and destroyed when loans are repaid.	Outside money	Money that is a net asset for the private sector, such as currency or central-bank reserves, created by the state.	Deposit multiplier	The ratio indicating how much the banking system can expand deposits (and hence broad money) for a given increase in reserves, assuming desired reserve ratios.	Money multiplier	A broader concept: the ratio of a measure of the money supply (e.g., M2) to the monetary base; reflects public cash holdings and banks’ reserve choices.	Discount window	The facility through which central banks lend short-term funds to depository institutions, usually at a penalty rate to discourage routine use.	Repurchase agreement (repo)	A short-term secured loan in which one party sells securities and agrees to repurchase them later at a predetermined price, widely used for liquidity management.	Open economy	An economy that engages freely in international trade and financial transactions, as opposed to autarky.	Autarky	A state of self-sufficiency where a country (or region) does not engage in international trade, relying solely on domestic production.	Trade openness	The degree to which an economy is exposed to international trade, often proxied by (exports + imports)/GDP.	Inclusive growth	Economic growth that is broad-based across sectors and segments of society, creating opportunities and reducing poverty and inequality.	Poverty trap	A self-reinforcing mechanism whereby low income leads to low saving and investment, keeping individuals or countries in persistent poverty.	Gini coefficient	A summary measure of income or wealth inequality ranging from 0 (perfect equality) to 1 (maximal inequality).	Lorenz curve	A graphical representation of income distribution showing the cumulative share of income earned by cumulative population percentiles.	Demographic dividend	The temporary boost to per-capita growth that can occur when a falling birth rate raises the share of working-age population relative to dependents.	Human capital	The stock of skills, education, health, and knowledge embodied in workers that enhances their productivity and earning power.	Convergence hypothesis	The prediction of the Solow model that poorer economies will grow faster than richer ones, narrowing income gaps, provided they have similar savings and technology.	Solow growth model	A neoclassical framework explaining long-run output per worker by capital accumulation, labor growth, and exogenous technological progress, yielding conditional convergence.	Endogenous growth theory	Models (e.g., Romer, Lucas) in which technological progress arises from intentional investment in R&D, human capital, or knowledge spillovers, allowing sustained growth without exogenous technology.	Total factor productivity (TFP)	The portion of output not explained by input quantities of labor and capital; often interpreted as technology or efficiency.	Capital deepening	An increase in the capital-to-labor ratio, raising labor productivity—distinct from technological progress.	Marginal product of capital	The additional output produced by one extra unit of capital, holding other inputs constant; declines in the Solow model due to diminishing returns.	Effective demand	Keynes’s concept that aggregate demand, not supply, determines actual output and employment in the short run.	Liquidity preference	Keynes’s theory that the demand for money depends on income and the interest rate, with people holding money for transactions, precaution, and speculation motives.	IS curve	The set of output–interest-rate combinations where the goods market is in equilibrium (investment equals saving).	LM curve	The set of output–interest-rate combinations where the money market is in equilibrium (money demand equals money supply).	Aggregate expenditure	The total planned spending in an economy—consumption + investment + government spending + net exports—driving short-run output in the Keynesian model.	Multiplier effect	The amplified impact on output from an initial change in autonomous spending, owing to induced consumption via the marginal propensity to consume.	Accelerator principle	The idea that investment depends on changes in output or expected demand; rapid growth “accelerates” capital spending.	Life-cycle hypothesis	Modigliani–Brumberg theory that individuals plan consumption and saving over their lifetime to smooth utility, borrowing when young and dissaving in retirement.	Permanent-income hypothesis	Friedman’s theory that consumption depends on expected long-run (“permanent”) income rather than current (“transitory”) income, implying consumption smoothing.	Consumption smoothing	The tendency of households to maintain a stable consumption path despite income fluctuations, using saving, borrowing, or insurance.	Precautionary saving	Extra saving undertaken to protect against future income uncertainty or adverse shocks.	Intertemporal budget constraint	The requirement that the present value of consumption cannot exceed the present value of income plus initial wealth over a lifetime or planning horizon.	Taylor principle	The guideline that a central bank should raise the nominal policy rate by more than one-for-one with increases in inflation to stabilize the economy.	Zero lower bound (ZLB)	The constraint that nominal interest rates cannot fall much below zero, limiting conventional monetary stimulus and motivating unconventional tools.	Negative interest-rate policy (NIRP)	A central-bank policy that sets certain policy rates below zero to encourage lending and spending when the economy is at the ZLB.	Unconventional monetary policy	Tools such as quantitative easing, forward guidance, or asset-purchase programs used when policy rates are constrained by the ZLB.	Quantitative tightening (QT)	The process by which a central bank reduces the size of its balance sheet—e.g., by allowing bonds to mature without reinvestment—effectively withdrawing liquidity.	Forward exchange rate	The exchange rate agreed today for a currency transaction that will occur at a specified future date, used for hedging and speculation.	Spot exchange rate	The current market price at which one currency can be exchanged for another for immediate delivery.	Real effective exchange rate (REER)	A trade-weighted index of a currency’s value adjusted for relative price levels, often used to gauge competitiveness.	Balance of services	The component of the current account that records exports and imports of intangible items such as tourism, transport, and business services.	Invisible transfers	Non-merchandise current-account items—including remittances, aid, and pensions—that involve cross-border income flows without a corresponding good or service.	Remittances	Money that migrants send back to family or friends in their home country, forming a significant and stable capital inflow for many developing economies.	Currency substitution	The voluntary use of a foreign currency alongside (or instead of) the domestic currency for transactions or savings, often in response to high inflation.	Parallel (black) market premium	The percentage by which an unofficial exchange rate exceeds the official rate, reflecting currency controls or scarcity.	Real exchange-rate misalignment	A persistent deviation of the actual real exchange rate from the level consistent with macroeconomic fundamentals and external balance.	Sovereign wealth fund (SWF)	A state-owned investment vehicle that manages national savings—often from commodity revenues or balance-of-payments surpluses—for long-term objectives.	Greenfield investment	Foreign direct investment involving the establishment of entirely new production facilities abroad, as opposed to acquiring existing firms.	Portfolio investment	Passive cross-border holdings of equity and debt securities below the threshold for significant control; more liquid and volatile than FDI.	Trade facilitation	Policy and institutional reforms (e.g., streamlined customs procedures, digital documentation) that reduce trade costs and speed cross-border movement of goods.