CAFE:

A federal law passed in 1975 at the peak of “the energy crisis” established CAFE (Corporate Average Fuel Economy). These regulations specify minimum average mileage per gallon for passenger cars and light trucks for all such vehicle manufacturers that sell in the United States. CAFE is intended to reduce energy consumption.

calendar effect:

See January effect.

call option:

A call option (or call) is a contract between a buyer and a seller that provides the buyer with the right but not any requirement to purchase a specific amount of a commodity or a specific asset at a fixed strike price no later than a specific expiration date. An American option may be exercised on any day prior to the end of the expiration date. A European option can be exercised only on the specified expiration date. See also option, American option, European option, put, hedge, short, and long.

call provision:

A call provision allows the issuer of a bond to repurchase it at will, with the bondholder being paid specific amounts that depend on when a call provision is exercised. Call provisions tend to be exercised when the values of bonds increase because of a drop in relevant interest rates. This limits the potential appreciation of the bond to the bondholder. However, call provisions are seldom if ever exercised when interest rates rise causing the values of bonds to fall. Consequently, a call provision shifts the bulk of interest rate risk to the bond holder. See also bond indenture, sinking fund and collateral.

Cambridge equation:

The Cambridge equation can be written as Md = kY, where Md is the demand for money and k is the proportion of nominal income (Y = PQ) that people desire for transactions purposes. In this specification, k = 1/V, where V is the income velocity of money. The Cambridge equation first appeared in 1917 in a paper by Arthur Cecil Pigou, but there are indications that the concept originated with Alfred Marshall. The Cambridge equation is an alternative to Irving Fisher’s [MV=PQ] formulation of the equation of exchange.

cannibalization:

Cannibalization occurs when expansion of one aspect of a firm reduces the sales or profitability of another part of the firm. For example, if Wal-Mart opens stores that are close enough to existing stores, the sales and profitability of the existing stores may decline because of cannibalization even if overall sales and profits increase.

capacity:

Capacity is an ambiguous term that sometimes suggests that a firm operate at capacity when it is producing the quantity at which average total costs are minimized. At other times, capacity seems to mean that a firm is operating at a level of output where the marginal cost curve becomes quite steep.

capacity utilization rate:

The capacity utilization rate is the proportion of a nation’s economic capital currently employed productively during some period of time.

capital:

Economic capital includes productive transformations of natural resources. Capital includes all construction, and machinery and equipment. Click on the resources link for more information on capital.

capital abundant:

A nation is capital abundant if it has more capital per worker (a higher K/L ratio) than other nations. See also labor abundant and Heckscher-Ohlin model.

capital account:

The capital account in the balance of payments accounting system is conventionally a record of the flows of financial and economic capital between a country and its trading partners. In the 1990s, this broad definition was renamed the financial account, and the term capital account was narrowed to consider only unilateral transfers of financial capital (ownership documents) between countries.

capital consumption allowance:

The capital consumption allowance is the amount of depreciation calculated by accountants to conform to tax laws and accounting conventions, a procedure that may yield tremendous discrepancies between the “book value” and the true market values of capital assets.

capital deepening:

Economic growth in which a country’s capital stock increases proportionally faster than its labor force; real per capita output normally rises.

capital formation:

Capital formation is the process by which a firm or nation accumulates new economic capital. Saving on the part of some economic agents is necessary for investment, which is usually an activity of different agents. The conveyance of the savings of some entities (e.g., households or firms) to investors in economic is called financial intermediation. See also saving, investment and economic investment.

capital gain:

A capital gain is a positive difference between the price at which an asset is sold and the lower price paid when the seller originally purchased the asset.

capital goods:

Capital goods are any produced resources (e.g., tools, equipment, or machines) other than buildings that ultimately benefit people indirectly by facilitating the production of consumer goods. See also roundabout production.

capital intensive:

A production process is described as capital intensive if efficiency (cost minimization) requires a higher capital-to-labor ratio than do most other production processes. A good for which efficiency in the production process requires relatively more capital than labor (a higher K/L ratio) than some other good is described as a capital intensive good. A good efficiently produced with relatively less capital and more labor (a lower K/L ratio) is described as a labor intensive good. The relative factor (resource) intensities of alternative goods and the relative factor abundances of nations are the foundations of the Heckscher-Ohlin model of international trade.

capital intensive labor:

Capital intensive labor is labor for which certain forms of capital are highly complementary in production. For example, a computer programmer is unlikely to be noticeably productive without a computer, oodles of software, electricity, and access to the internet.

capital market:

A capital market is a market in which long term (>1 year) financial capital (stocks and bonds) is traded. International capital markets are increasingly efficient, so that economic and financial capital flow across national borders rapidly (over $600 trillion annually) when investors perceive differences in expected rates of return.

capital structure:

1.     The term capital structure is sometimes used as a synonym for a nation’s infrastructure.

2.     The capital structure of a corporation is the mix of debt (e.g., bonds) and equity (e.g., stock) used to finance the firm. See also debt-equity ratio.

capital widening:

Capital widening occurs when an economy grows and the labor force and the capital stock increase by the same proportion.

capitalism:

An economic system based on private property rights and emphasizing private, as opposed to governmental or collective, decision making. See also laissez faire and contrast with socialism.

capitalization:

Capitalization is the process whereby income streams are transformed into wealth, resulting in the elimination of economic profits. See also present value, Capitalization on Insider Information

capital-to-labor ratio:

The capital-to-labor ratio (K/L) is the amount of capital used per worker in a firm, or on average across an entire nation, and tends to be positively related to productivity and per capita income.

capitation:

Capitation is a pricing policy for medical care wherein a health maintenance organization agrees to care for its clients for a single fee per member.

cardinal measurement:

A variable is cardinally measurable if a given interval between units of the variable has a consistent meaning, i.e., if the measure of the variable corresponds to fixed-interval points along a line. For example, height, output, and income are cardinally measurable. Open the cardinal vs. ordinal file for more discussion, or see also ordinal measurement.

caring externality:

A caring externality is the positive enjoyment one person derives from the knowledge that other people are benefiting from an activity, such as the provision of health care. Another example of a caring externality occurs when people are not guilt-ridden by being confronted with impoverished people because other people have donated to charities that have ameliorated poverty somewhat.

carrying capacity:

Carrying capacity refers to the maximum sustainable population of an organism, and it depends on the amounts of food, water and other necessities available in an ecosystem without substantial degradation to the organism or environment.

cartel:

A cartel is an organization of firms that jointly make decisions about prices and production for the entire group, and usually attempts to charge monopoly prices and limit production to monopoly rates of output. The Organization of Petroleum Exporting Countries (OPEC) is an example.

Cartesian coordinate:

Cartesian coordinates are an ordered set of numbers (x,y) that identifies how variables may be related graphically along a horizontal x-axis and a vertical y-axis. Open the figure for the Cartesian coordinate system for more discussion.

cash:

Noun: Cash is a synonym for currency. Verb: To cash is to convert an asset into cash. In a strategic game [e.g., poker], to cash is to convert an advantageous position into cash, by, for example, raising a bet and forcing the withdrawal of an opponent who has, at least temporarily, a disadvantaged position.

cash cow:

A cash cow is a product or a division of an organization or, from the perspective of a potential acquirer, an entire organization that is not expected to grow appreciably, but which is expected to generate a reasonably stable net cash flow into the predictable future.

cash crop:

A cash crop is a crop grown by a farmer and intended for sale instead of being consumed on the farm. Contrast with subsistence crop, which is grown to provide sustenance for a farmer’s family.

cash flow:

The total monetary revenue derived from an asset during a specific time interval. See also net cash flow.

castle-in-the-air theory:

Market fundamentalists who describe castle-in-the-air theory are usually skeptics who believe that gullible investors often create “castles in the air” because irrational optimism leads them to rush into investments without adequately considering down-side risk. These fundamentalists identify intrinsic value as the only reliable guide for asset pricing. See also: efficient markets, fundamental analysis, technical analysis, Keynesian beauty contest.

catallaxy:

Catallaxy is the term Friedrich Hayek applied to his theory that orderly rules governing market transactions emerge spontaneously and naturally when people meet to pursue their own interests by buying and selling goods and resources within the framework of laws established by the government.

catch-up effect:

The catch-up effect is the core of a theory contending that poorer and more backwards economies tend to grow more quickly than prosperous developed economies.

categorical assistance:

Categorical assistance entails governmental transfer payments or provision of assistance in kind to members of specific groups of people, such as single parents, veterans (education subsidies or VA hospitals), the elderly, or the disabled.

causation:

The relationship whereby one variable (the independent variable) is not only highly correlated with another variable (the dependent variable), but actually causes changes in the independent variable. In 2003, C.W.J. Granger [1934-  ] was awarded a Nobel Prize, in part because of his development of time-series statistical methods for ascertaining causation.

caveat emptor:

Caveat emptor is Latin phrase used to characterize an ancient legal doctrine which suggests that buyers are the best judges of whether or not they receive full value from the goods they purchase, and that buyers should bear the consequences of their own decisions; a Latin phrase meaning “let the buyer beware.” Contrast with caveat venditor, and see also consumer protection.

caveat venditor:

Caveat venditor is a legal doctrine reflected in prohibitions against fraud and in sellers’ legal liability for damages if unknown dangers lurk in a product; a Latin phrase meaning “let the seller beware.” Contrast with caveat emptor.

CDO:

See collateralized debt obligation.

ceiling:

A price ceiling is the maximum price that can be charged by a seller when wage- or price controls are enacted by a legislative body. See also price controls and floor.

Celler-Kefauver Antimerger Act:

The Celler-Kefauver Antimerger Act (1950) made it illegal for major firms to acquire the stock or assets of their competitors.

central bank:

An institution whose function it is to make a nation’s financial system operate smoothly by issuing currency and regulating the supply of money and credit; and which serves as the government’s banker. The central bank of the United States is the Federal Reserve System, or FED.

central planning:

When central planning (or centralized decisionmaking) is the dominant allocative mechanism in a country, major economic decisions are made by government bureaucrats employed at some central authority, as in the Soviet Union from 1927 until it dissolved in 1989. Even the most capitalistic of nations may temporarily rely heavily on central planning during major wars, as happened in the United States, for example, during World War II. For a comparison between central planning policies and laissez-faire ones, click on the link.

centralization:

An organizational structure in which decision making entails “top – down micromanagement” is a centralized bureaucracy. Although often ascribed to government agencies, many huge corporations also suffer from excessive centralization.

ceremonial fund:

A ceremonial fund is the value of resources devoted to such ceremonies or rituals as promotions, graduations, weddings, inaugurations, coronations, funerals, celebrations of victory, self aggrandizement, or other rites of passage. See also conspicuous consumption, Thorstein Veblen and institutional economics.

certainty:

Certainty, an aspect of complete information, entails precise knowledge of current and all future values of an economic variable or set of economic variables (e.g., market conditions). See the link for risk and uncertainty for more discussion. Contrast with uncertainty, risk, and Knightian uncertainty.

certainty effect:

The certainty effect focuses on how people prefer an option with a given gain perceived as certain over an alternative gain which may have at least as great or an even greater expected value if the alternative gain is perceived to be less certain. The elimination of perceived risk is viewed as more desirable than a mere reduction of risk. For example, many people will choose an option guaranteeing a $3,000 gain over an option that yields $4,000 80% of the time, but nothing 20% of the time. However, behavioral economists also note that people have limited understanding of how differences in probabilities affect the expected values of alternatives. See also behavioral economics and prospect theory.

certificates of deposit

Certificates of deposit (CDs) are very long-term, high-value savings accounts issued by financial institutions.

ceteris paribus:

Economists use the Latin phrase ceteris parebus to mean, “All else held constant.” Following methodology formalized by Alfred Marshall, economists invoke ceteris paribus extensively in their analyses, especially in partial equilibrium models. Contrast with general equilibrium and mutatis mutandus.

chain of distribution:

A chain of distribution begins with raw material suppliers, and continues to manufacturers who transform raw materials into products. These goods are then frequently distributed to wholesalers or other intermediaries, who in turn convey these goods to retailers, which are then sold to the ultimate users. See also supply chain and disintermediation.

chain –weighted CPI:

Unlike the standard CPI, which measures only price changes from year to year, a chain weighted CPI includes changes in quantities purchased, thus reflecting changes in spending patterns. See also Consumer Price Index.

Chamberlin, Edwin Hastings

Edwin Hastings Chamberlin [1899-1967] developed the theory of monopolistic competition, which addressed firm behavior in markets in which differentiated products that are close substitutes are sold, but in which no significant barriers to entry exist, with the result that in the long run, monopolistically competitive firms can expect to generate no economic profit. In the past thirty years, this theory has become a foundation for the new theory of international trade.

change in demand:

Graphically, a change in demand is a shift of the entire demand curve in response to a change in one of the determinants of demand. A change in price does not change demand—the demand curve does not shift.

change in quantity demanded:

A change in quantity demanded results from a change in the price of the good, and is reflected in a movement from one point on a given demand curve to another point on that curve.

change in quantity supplied:

A change in quantity supplied is shown by a movement along an existing supply curve and occurs with a change in the price of the good or service.

change in supply:

Graphically, a change in supply is a shift of the entire supply curve in response to any change in a determinant of supply other than the good’s own price.

channel stuffing:

Channel stuffing is an illegal strategy that involves overfilling orders from intermediaries further along in the supply chain, and billing those intermediaries so that inflated accounts receivable initially overstate the channel stuffer’s profitability in a period. This can result in a temporary increase in the price of a stock, enabling corporate managers to survive irate shareholders, or to sell stock options that are part of executive compensation packages. The excess shipments are usually returned, reducing reported accounting profits in a subsequent period, and deflating the value of the company’s stock.

chaos theory:

Most scientific theory (including much of conventional economics) posits convergent and stable paths towards a fixed long run equilibrium. Chaos theory is the notion that either a small change in initial conditions or minute random disturbances across time can drastically change the long-term path or behavior of a system. See also hysterisis, path dependence, and historicism. Contrast with determinism.

charity:

[1] Charity is private giving from those who deem themselves fortunate to those whom the givers deem as markedly less fortunate. [2] A charity is an organization that channels goods or funds from private givers to the recipients of charity. Charitable giving entails a free rider problem because generous private givers may reduce the need for charity perceived by other potential donors. Consequently, many voters support governmental redistributions of income and wealth. See also welfare payments.

chartists:

Individuals who use technical analysis in attempts to predict the future paths of the prices of financial instruments are called chartists. Chartists reject efficient markets theory and believe that past changes in price can be used to predict future changes. See also efficient markets, technical analysis, Keynesian beauty contest, and castle-in-the-air theory.

chase equilibrium:

Chase equilibrium is the idea that a static equilibrium is never achieved, and that instead, equilibrium may be a moving target towards which market economies gravitate. This term was coined by David Colander, a neoKeynesian.

check-off provisions:

A check-off provision in a labor union contract requires deductions of union dues from workers’ paychecks, and the dues are then paid directly to the union. A majority of workers in a union must formally vote for a check-off provision or the practice is illegal, under the Taft-Hartley Act of 1947.

cherry picking:

“Cherry picking,” also known as favorable selection, is an antonym for adverse selection. Examples of favorable selection would include an HMO attempting to cover only relatively healthy patient populations, or an auto insurance company’s attempts to choose clients with characteristics [good driving records, age, occupation, education, gender, or place of residence] associated with lower probabilities of costly auto accidents.

Chicago Climate Exchange:

The Chicago Climate Exchange (CCX) is a market based on legally binding “cap-and-trade” pollution-control credits that allow the owner to emit specified amounts of one of the six major greenhouse gasses.

Chicago School:

The Chicago School broadly advocates a libertarian approach to social issues and a laissez-faire approach to economic issues. This school of thought was centered at the University of Chicago roughly from the 1920s when it was led by Frank Knight and Jacob Viner through the 1970s, when Milton Friedman and George Stigler were its most notable advocates. During Friedman’s tenure, it was a bastion of monetarism, which offered an alternative to Keynesian theory in addressing Aggregate Demand and macroeconomic policy, but more recently the theories of rational expectations and efficient markets have been dominant. Stigler’s influence was primarily microeconomics, and was manifested in hostility to excessive regulation and antitrust activity. Today, the Chicago School is more dispersed, with significant adherents at such outposts as UCLA, George Mason University, and the University of Rochester.

choice architect:

Choice architects organize the context in which other decisionmakers choose. For example, people who specify how items are arrayed in a grocery store (e.g., on an end cap, next to the checkout stand, at eye level on a shelf in the aisle that receives the most customer traffic) are choice architects, as are members of committees that determine whether the default for employee health insurance coverage will cover, e.g., Lasik eye surgery or orthodontia. The way information about choices is presented is called framing. Research by behavioral economists and marketing specialists has demonstrated conclusively that how choices are presented powerfully shapes the choices people make. See also prospect theory and nudge.

choke price:

The choke price is the lowest price for a good or service at which the quantity demanded of the good or service is zero.

Christian socialism:

Christian socialism emphasizes the virtues and dignity of work, advocates labor unionization, and opposes such violent activities as war or terrorism. For example, Christian socialists reject the violent revolutions to overthrow capitalism advocated by radical socialists and communists.

churn:

Churn sometimes refers to rapidly buying and selling assets to take advantage of small changes in prices, thereby generating greater income for the owner of a portfolio. The churning of assets by brokers who are acting as fiduciaries over estates is sometimes used to fraudulently generate commission income for the brokers. Another very different meaning for churn refers to the turnover in employment or industrial structure that occurs as a consequence of technological change or expanded international trade. This use of the term churn is similar to the term creative destruction that Joseph Schumpeter applied when describing the dynamics of a capitalistic system.

circular flow model:

A circular flow model shows how goods and resources flow among households, firms, and government through markets in exchange for payments. Households are centers for wealth holding and consumption, and buy goods from the firms that produce them; firms buy resources from households in order to produce goods and services. The circular flow model may be the oldest formal economic model extant, tracing its origin back to the writings of the French physiocrat Francois Quesnay. Click on the link for more information on the circular flow model and how households, firms, and government interact within it.

Clark, John Bates

John Bates Clark [1847-1938] was the first major American economic theorist, and is remembered today primarily for developing of the marginal productivity theory of income distribution, which contends that when resource owners are all paid the values of their marginal products, the total value of production and income are exhausted, and that such a distribution of income is an equilibrium condition for a competitive market-based economy.

Clark-Wicksteed theorem:

The Clark-Wicksteed theorem asserts that output [Q] is exactly equal to income [Y] if each unit of a resource generates a payment to its owner precisely equal to the value of its marginal product [MPP]: Such payments are an equilibrium result if all resource and product markets are perfectly competitive, and if production functions are linearly homogeneous. If these conditions are met, then the Clark-Wicksteed theorem holds and Q = Y = (MPPL × L) + (MPPK × K) + (MPPN × N) = wL + iK + rN, where L = labor, w = the wage rate, K = capital, I = interest payment to each unit of capital, and N = land, and r = rental rate per unit of land. The Clark-Wicksteed theorem is named after the American economist John Bates Clark [1847-1938] and the English economist Phillip Wicksteed [1844-1927]. See also marginal productivity theory of income distribution.

class warfare:

The theory of class warfare hinges on the idea that historical change is driven by differences in the prosperity of people at the top of society from people at the bottom. According to Karl Marx, class struggle [class conflict] is inevitable, and the working class will inevitably prevail over the capitalistic elite. The defenders of the current state of affairs [the status quo] often condemn as “class warfare” the advocacy of policies to redistribute income or wealth, or to make the tax structure more progressive.  See also trickle-theory, trickle-up theory, Marxism, and supply-side economics.

classical monetary transmission mechanism:

The classical monetary transmission mechanism emphasizes strong and direct linkages between the money supply and changes in aggregate spending and consequently, National Income. Contrast with the Keynesian monetary transmission mechanism, which emphasizes changes in interest rates induced by changes in the money supply as the primary forces through which monetary policy affects economic activity.

classical theory:

1. Classical theory is the collection of ideas that followed and elaborated on the theories of Adam Smith, and continued to be the dominant approach to economics roughly through the writings of John Stuart Mill. Foci of this early classical theory included international trade, population, economic growth, and the distribution of income. Classical economics was largely based on logic and intuition, and much of classical economics is bereft of formal mathematics.

2. Classical (or more precisely, neoclassical) theory is the term often used to refer to the systematic study of the functioning of a market economy that emerged when calculus began to be incorporated into economics in the middle of the nineteenth century. Neoclassical theory focuses on marginal adjustments. Neoclassical macroeconomics concluded that, in the long run, a market economy will achieve equilibrium at a full employment level of GDP, assuming the validity of Say’s Law and the flexibility of wages, prices, and interest rates. This use of the term “classical economics” is used almost interchangeably with neoclassical economics, or neoclassical macroeconomics.

Clayton Act

The Clayton Act (1914) specified offenses more precisely than did the Sherman Act (1890). The Clayton Act forbade price discrimination and interlocking directorates, exempted collective bargaining from antitrust actions, and exempted agricultural associations so that nonprofit corporations could be formed without violating antitrust laws. Sometimes referenced as the Clayton Antitrust Act.

clearinghouse:

A clearinghouse is an organization that processes and finalizes financial paperwork representing agreements between two or more parties. Federal Reserve District Banks, for example, provide electronic clearings for checks written from the accounts of a bank and deposited in other accounts, usually in other banks.

cliometrics:

Cliometrics is the process of building formal models to explain specific aspects of economic history, and then statistically testing the resulting hypotheses. Cliometrics has been used to address such varied issues as whether slavery was profitable, the importance of railroads in economic development, and whether gambling on elections resulted in increased political corruption.

closed economy:

A closed economy is an economy that neither exports nor imports. See also autarky and open economy.

closed end fund:

A closed end fund is a mutual fund that issues a fixed number of shares.

closed shop:

A closed shop is a firm that has agreed to hire only union members. In the United States, these agreements are illegal under the Taft-Hartley Act (1948).

closely-held corporations:

Closely-held corporations are usually owned by a tiny number of shareholders, and secure limited liability and favorable taxation for family owned businesses or partnerships.”

clustering:

See economies of agglomeration.

Coase theorem(s):

The Coase theorems assert that

1.      If (a) property rights are fully specified and enforced and (b) transaction costs (e.g., information and mobility costs) are zero, then voluntary exchange invariably yields Pareto efficient solutions.

2.      Institutions exist solely to reduce transaction costs and facilitate efficiency.

See this Coase theorem link for corollaries and elaboration.

Cobb-Douglas production function:

A Cobb-Douglas production function is a “well-behaved” homogeneous production function f specifying how, e.g., capital (K) and labor (L) are translated into output (Q):

Q = f(K, L) = AKaLb

where A,  a  and  b  are constants. The level sets of a Cobb-Douglas function are homothetic (radial expansions of each other). A Cobb-Douglas function is linearly homogeneous if a +b = 1. Similar mathematical constructs are sometimes used in models based on well behaved consumer preferences.

cobweb theory:

The cobweb theory hypothesizes that the time absorbed between beginning and completing a production process may create cyclical variations in prices and outputs, and is usually applied to agricultural products, although cobweb models are also applied to labor markets, as when accumulation of human capital generates boom-bust cycles in the markets of, for example, engineers or computer programmers.

coefficient:

A coefficient is constant number that reflects a relationship between variables. In Cartesian space, for example, the slope coefficient m is the multiplicative factor that relates a variable on the X axis to the variable on the Y axis: Y = mX + b.

cognitive bias:

A cognitive bias arise from failures to process information in a fashion that facilitates decisions that can rationally be expected to optimize accomplishment of the decisionmakers’ goals.

cognitive dissonance:

Cognitive dissonance refers to psychological discomfort arising from differences between a person’s belief structures and the preponderance of evidence. For example, if you continued to expect a stock to make you rich despite mounting revelations that the firm’s claims that had induced your initial investment were fraudulent, your faith in the stock would be likely to waver, and this growing ambivalence is cognitive dissonance.

cognitive psychology:

Cognitive psychology is the study of how people process information, and focuses on human mental processes such as thinking, memory and decision making. Cognitive psychologists emphasize such things as desires, intentions, and systems of beliefs. Research findings by cognitive psychologists have motivated behavioral economists to challenge many of the conventional assumptions that orthodox economists use in attempts to explain human behavior. See also prospect theory.

coincident economic indicator:

A coincident economic indicator is a variable that changes in a reasonably systematic way when the overall state of the economy changes, usually hitting its peaks and troughs roughly when the overall economy experiences its peaks and troughs. See also lagging economic indicator and leading economic indicator.

coinsurance:

A coinsurance [or co-pay] clause in a medical insurance policy requires the patient to pay x percent of the cost of medical treatment, or a fixed payment per prescription. This is often coupled with a deductible where the patient pays the first y dollars of a given medical treatment or the first y dollars of medical treatment within a given period (usually a calendar year).

COLA:

A COLA, or cost-of-living-adjustment, is a clause in a contract that provides for increases in payments [e.g., wages to labor] that rise proportionally with the consumer price index [CPI].  See also escalator clause.

collateral:

Collateral is an asset of the borrower that serves as security for a loan.  The lender can acquire ownership of the asset if the borrower defaults on the loan, and then sell the asset to at least partially recover the funds loaned. If the sale price exceeds the indebtedness, the borrower usually receives the amount remaining after the loan has been paid. Without collateral, the lender would be faced with severe adverse selection problems and would be reluctant to loan, while the borrower would be more likely to evidence the problem of moral hazard.

collateralized debt obligation:

A collateralized debt obligation (CDO) is a financial instrument that bundles diverse forms of debt ranging from corporate bonds to mortgage-backed securities to instruments backed by blocks of consumer debt. CDOs are sold in slices that, because of diversification, mitigate the need for a risk premium and which, consequently, tend to yield more secure rates of return than would be expected from the underlying instruments if not bundled. The increasing complexity of CDOs is partially blamed by some critics for the credit crisis of 2007-2008 because this complexity posed problems for evaluating the appropriate prices of these instruments. See also risk premium, securitization, and mortgage backed securities.

collective:

A collective is an organization that is usually focused on some form of production and all members of the organization theoretically share ownership of the assets of the collective, which, at least in theory, is operated for the mutual benefits of all members. See also collectivization.

collective bargaining:

The process by which workers who are members of a labor union negotiate with an employer to set wages, hours, and working conditions. See also strike and lock-out.

collectivization:

The process of collectivization entails a move away from private ownership to social )collective) ownership. Collectivization most commonly refers to shifts from private ownership of farm land to the collective social ownership of vast tracts of land. Agricultural collectivization failed miserably during the 1920s in the Soviet Union, where collectivization was imposed most extensively. Total agricultural output plummeted, and millions of farm workers who had previously been family farmers (kulaks) starved to death, primarily in the Ukraine. Contrast with privatization.

collinearity:

Variables treated as independent in regression analyses are collinear if they are systematically related.  Collinearity makes it unfeasible to find reliable estimates of the regression coefficients because the separate effects of each independent variable on the response variable cannot be isolated and identified.

collusion:

Collusion is an agreement among firms to share markets by coordinating actions in a manner that affects market prices or quantities. Many forms of collusion are violations of U.S. antitrust laws.

command economy:

A command economy is an economic system that resolves major parts of the basic economic questions through central planning; allocations of inputs and distributions of goods are coordinated by a centralized government bureaucracy. See also central planning.

commercial bank:

A commercial bank is a financial institution open to the public for such common transactions as accepting deposits and lending money. Contrast with investment bank.

commercial paper:

Commercial paper refers to contracts for short term unsecured loans to corporate customers from their banks. Commercial paper usually matures in 30 to 50 days, and almost always in less than 272 days.

commerce clause:

The commerce clause of the U.S. Constitution grants the federal government the right to regulate all trade across state lines and to preventing trade restraints between states.

commingling:

Commingling is the illegal or immoral practice of some fiduciaries of diverting for their own use the funds of the individuals whose funds they are supposed to guard and conserve or invest.

commitment device:

A commitment device is an incentive structure a decisionmaker uses to ensure follow through on a decision. For example, a commitment device could be a contract that a smoker determined to stop might sign promising say, $5000, to a political party the smoker opposes, in the event that the individual smokes a cigarette after a given date. Similarly, in 1519 Hernando Cortez famously committed his 600 soldiers to conquest by burning his ships after all had disembarked on the beaches of Mexico.

commoditization:

Commoditization refers to the process in which previously high-cost goods become lower priced because production processes become quite standardized and so many firms begin producing what was formerly a luxury good or a recently innovated “brand-name” good that consumers begin viewing these goods as close or even perfect substitutes, regardless of which firm produced a particular unit. For example, recordable DVDs have recently been commoditized as buyers increasingly begin viewing these disks as generic.

commodity:

Any tangible produced good is a commodity. Commodities, unlike services, usually may be owned.

commodity exchange:

Commodity exchanges are markets in which reasonably homogenous commodities (such as steel, cotton, hog bellies, or orange juice concentrate) are traded, normally through prices established through public outcry.

Commodity Futures Trading Commission:

The Commodity Futures Trading Commission is an agency of the U.S. government that regulates futures trading on eleven U.S. futures exchanges.

commodity money:

Commodity money has substantial value independently of what it will buy. Gold and silver coins are examples of commodity money. Open the stone money of Yap link for an interesting historical example, and see also debasement, gold bug, and Gresham’s law.

commodity prices:

The commodity price index is an index of the prices of reasonably homogenous major commodities (such as gold, wheat, or oil) traded in worldwide markets.

common property resources:

The “commons” are shared areas or natural resources that are accessible to all comers because the property rights of individuals are not clearly specified. If overused or shared without regulation, the commons are often exhausted or become too congested to fulfill the needs of all who use it. Usually associated with the environments and situations involving, natural resources, air, land, or the sea. See also tragedy of the commons.

common sense:

“Common sense” is theory tested over a long period and widely believed to be useful, although it is sometimes simply outdated or wrong.

common stock:

Ownership shares in a corporation are known as common stock, and are sometimes references as “equity” or simply “shares”. Click on the link for common stock.

commons:

See common property resources.

communism:

Communism is an idealized classless society in which all people would live and work under the condition “from each according to ability, to each according to needs”; under communism, all nonhuman property would be owned collectively.

Communist Manifesto:

The Communist Manifesto [1849] was a booklet authored by Karl Marx and Friedrich Engels stating the platform of the Communist Party, founded in the same year.

company town:

A company town is a locale in which one large firmn employs such a large percentage of the working population that it dominates local employment practices, including wages. See Toyota City

comparable worth:

The idea that jobs typically filled by women should generate wages equal to those paid to men with comparable skills.

comparative advantage:

A comparative advantage in producing or selling a good is possessed by an individual or country if they experience lower opportunity cost in producing the good. Open the file on comparative and absolute advantage for a table and more discussion.

comparative advantage, law of:

The law of comparative advantage is an assertion that mutually beneficial trade can always take place between two countries (or individuals) whose pretrade cost and price structures differ. This law was first elaborated by David Ricardo [1772-1823].

comparative statics:

Comparative statics is a method of studying the effects of a change in an independent variable on a dependent variable by comparing the new equilibrium with the equilibrium prior to the change. For example, comparative statics is used to analyze how a change in some determinant of demand (or supply) affects the equilibrium price and quantity in a market. Comparative statics is the dominant methodology of partial equilibrium analysis.

compensating variation:

A compensating variation is the subjective value of the bundle of other goods and services (often represented by money) required to make an individual just as well off after adjusting to an event as before the event occurred. Compensating variation as an analytical concept originated in attempts to decompose the effect of a price change into the income effect and the substitution effect. In the case of a price cut, compensating variation would be the amount the consumer would need to surrender to maintain the original level of satisfaction, given the new set of relative prices. In the case of a price hike, compensating variation would be the amount the consumer would need to receive to reattain the original level of satisfaction. The concept of compensating variation is a bit amorphous, in part because the marginal utility of income is implicitly assumed constant. Another difficulty with the concept is that meaningful measures of compensating variation across multiple individuals would require interpersonally comparable measures of the marginal utility of income. [Note: Attempts to use compensating variation as a mechanism for ascertaining damages in court cases raises an interesting point about property rights and income effects. Consider a malpractice case in which the plaintiff is a patient who lost functionality in a kidney. The amount the patient would charge before voluntarily surrendering the kidney would normally greatly exceed the amount that the patient would be willing and able to pay to keep the kidney functioning.]

compensating wage differentials:

Compensating wage differentials are the increases in wage rates associated with jobs requiring greater skill, strength, dexterity, or entailing less safety, greater risk, or a less pleasant work environment. A professional football player, for example, is likely to have a higher income than a furniture mover. A job that requires an advanced degree (e.g., a neurosurgeon) is likely to pay more than a job requiring only a high school education (e.g., a grocery store clerk). And a bulldozer operator working near the Artic circle is likely to be paid more than a bull dozer operator in Iowa.

competition:

A process driving price close to opportunity cost. Pure competition requires: (a) numerous potential buyers and sellers; (b) homogeneous outputs or inputs, precluding nonprice competition; (c) each buyer and seller to be small relative to the market so that no single decision will influence the price of the item or service; and (d) an absence of long run barriers to entry or to exit. Perfect competition requires, in addition, that transactions entail complete information and perfect mobility, so that all contracting costs are ignored. See also contestable markets theory, competition and rivalry , competition in global economy

competitive labor market:

In a competitive labor market, there are so many buyers (firms) and so many sellers (workers) that no individual or organization alone can affect output prices or the wage rate.

complements:

Complements are goods that are consumed together, such as tennis racquets and balls, hot dogs and mustard, left shoes and right shoes, and cars and gasoline. A negative cross-price elasticity of demand exists between complementary goods.

complete information:

Perfect or complete information is a common assumption in economic models, and exists if buyers and sellers of goods or resources know with precision everything necessary for them to make optimal decisions. Market failure whereby voluntary transactions yield inefficient solutions may result from uncertainty, asymmetric information, rational ignorance, or bounded rationality. See also prospect theory.

compliance costs of regulation:

Compliance costs of regulation are costs incurred primarily by the private sector (and also by state and local governments) in the process of complying with regulations. Open the direct cost of regulation file for more discussion, or see also administrative costs of regulation.

composite good:

A composite good is a hypothetical good commonly posited when consideration is needed of only a single representative good in an abstract model of consumption, production, or aggregate output. In partial equilibrium analysis, a composite good is used to represent all goods other than the specific good(s) being analyzed. Labels commonly applied to composite goods include manna, shmoo and widgets.

composition-shift inflation theory:

The composition-shift theory of inflation assumes the price level tends to rise because the structure of economic activity is in constant flux, and that wages and prices rise more easily than they fall. Growing sectors of the economy will typically experience increases in wages and prices, while declining sectors suffer from stagnation and unemployment rather than long-term wage and/or price cuts. See also asymmetric wage-price reaction functions.

compound interest:

The term “compound interest” refers to the incremental and cumulative earning of interest in each period on interest earned in previous periods, in addition to interest earned on the principal of a loan or deposit.

Comptroller Of the Currency:

The Comptroller of the Currency is a federal agency that charters all national banks and then, in cooperation with the Federal Reserve System (Fed) and the Federal Deposit Insurance Corporation (FDIC), regulates national banks. The Comptroller is also authorized to, if necessary, declare national banks insolvent.

computational complexity:

Some economists now refer to computational complexity in recognition that resources, including time, are absorbed in making the calculations required for the rational decisionmaking that economists had conventionally assumed instantaneous, costless, and innate to human contemplation. Further, humans may simply be unable to resolve certain mathematical problems or to pursue to their logical conclusions certain complex chains of reasoning. Thus, humans are recognized as less than perfect processors of information, and decisions are constrained by bounded rationality. See also heuristics.

concave set:

A mathematical set is locally concave if straight line segments between points on the surface of the set contain points not on the interior or surface of the function. A set is strictly concave if all points on all line segments between any two points on the surface of the set are external to the surface of the set, the sole exceptions being the two end points. Contrast with convex set.

concentration ratio:

A concentration ratio is the percentage of some aspect of market performance (e.g., sales or employment) wielded by the largest 4 or 8 or 20 or 50 firms in an industry.

Condorcet paradox:

Also known as Arrow’s paradox. See voting paradox.

confidence interval:

In statistical models (including econometric models), a confidence interval identifies a range of values in which the unknown population parameter (μ) is likely to be found with a certain percentage of confidence.  The interval is calculated from a set of sample data. Confidence intervals are usually calculated at the 90% or 95% or 98% or 99% levels. The statistics used to calculate a confidence interval are: (a) the sample mean (M), (b) the value of Ζ (your chosen percentage level of confidence), and (c) the standard error of the mean (σM). Solving, the confidence interval can be expressed as M – ΖσM  ≤μ≤ M +ΖσM.

confirmation bias:

Confirmation bias, sometimes called confirmation bias, refers to a psychological tendency to focus on facts or theories that reinforce our preconceived notions. Stereotyping is a gateway for confirmation bias. You may screen out contrary evidence and emphasize supporting evidence when confronted by contradictory evidence. For example, suppose you believe effective leaders to be tall and handsome. You may tend to discount the accomplishments of a short strategist of ordinary appearance (“lack of American willpower handed victory in Vietnam to Ho Chi Minh”), or to excuse fundamental misinterpretations of history by more imposing figures (“Westmoreland’s brilliant tactics revealed a light at the end of the tunnel, but some Americans’ lack of patriotism made defeat inevitable”).

confiscation:

Confiscation is a term used to characterize governmental acquisitions of goods or resources other than through voluntary exchange. In the United States, government uses its right of eminent domain to secure land or property for such things such as highway rights-of-way or areas for dams or parks, and in times of war, may resort to a draft to secure military personnel.

conglomerate:

A conglomerate is a firm that operates in several different industries.

conglomerate merger:

A conglomerate merger is a merger of firms that operate in different output markets, or occurs when one firm acquires an unrelated firm.

conjunction fallacy:

The conjuction fallacy involves attributing the likelihood of two uncertain events happening simultaneously as greater than either event happening alone. A conjuction fallacy is committed, for example, if someone knows that four families in a neighborhood with 100 families have defaulted on their home mortgages, and believes that the likelihood of default is about twenty percent because all the defaulted homes were next door to the person making this estimate.

conscious parallelism of action:

A legal finding that firms have implicitly and illegally colluded to exploit their shared market power by raising prices and establishing market territories is sometimes describes this behavior as conscious parallelism of action.

consols:

Consols are perpetuities issued by the Bank of England. A perpetuity is a bond that will pay a fixed amount of money or annuity (A) each year until it is repurchased by the government that issued it. The price (P) and interest rate (i) on a perpetuity are in accord with the formula P = £A⁄i . If you know the values of two of these variables, the third is easily computed.

consortium:

A consortium is a group of economic agents that cooperate to accomplish a particular project or goal.

conspicuous consumption:

The iconoclastic American institutional economist Thorstein Veblen identified conspicuous consumption as any spending intended to illustrate the relative class, status, and power of the individual spender. Snobbery and an intent to illustrate that a social or economic inferior cannot afford such extravagances motivate conspicuous consumption.

constant cost industry:

The long run industry supply curve is horizontal; constant per unit production costs are incurred for every output level because the supplies of all the resources used are perfectly price elastic.

constant returns to scale:

A production function exhibits constant returns to scale if increases in all inputs by a given proportion yields a precisely proportional increase in output. See also decreasing returns to scale and increasing returns to scale.

constructivism:

Constructivism is the term used pejoratively by Friedrich Hayek to characterize the views of “enlightened” leaders who believe, mistakenly, that they can steer a society in directions that will be superior to the direction accomplished via democracy and the operations of a market economy.

Consumer Confidence Index:

The Consumer Confidence Index [CCI] is a monthly estimate of consumer expectations and attitudes based on surveys of U.S. households. The CCI is compiled by The Conference Board, a private research organization, and is intended to improve macroeconomic forecasts of consumer spending and and saving, and consequently, the overall prosperity of the United States. The University of Michigan’s Consumer Sentiment Index is a similar estimate of consumer expectations.

consumer cooperatives:

The members of consumer cooperatives share savings achieved by buying in quantity, usually in proportion to the amounts a member purchases.

consumer equilibrium:

Consumer equilibrium occurs when consumers lack any net incentive to change their purchasing patterns.

1.         The cardinal utility approach: A consumer maximizes total utility when the last cents spent on each good yield the same number of utils of satisfaction; no reallocation of spending will increase total utility.

2.         The ordinal approach using preference functions: Consumers maximize satisfaction upon reaching tangency between their budget constraint lines and the highest attainable indifference curves. See also utility function and preference function.

consumer goods:

Consumer goods directly satisfy the user and include most ordinary objects of everyday use: food, clothing, appliances, cars and so on.

Consumer Price Index:

The consumer price index (CPI) provides a statistical comparison, over time, in the prices of goods bought by typical urban consumers; the base year equals 100, with subsequent changes in the price level reflecting inflation (over 100) or deflation (under 100).

Consumer Product Safety Commission:

The Consumer Product Safety Commission requires reporting of product defects and enforces regulations intended to reduce unreasonable risks of injury from consumer products.

consumer protection:

“Consumer protection” refers to a set of laws, regulations, and court cases intended to ensure that the fine print in contracts is not unconscionable, that products such as cars and toys are safe, that foods is not contaminated, that drugs are effective, and that fraud is not rewarded. Laws now require truth in advertising and truth in lending laws specify that interest rates must be expressed in standard ways. See also caveat emptor and caveat venditor. Click on the link for consumer protection for more discussion.

Consumer Sentiment Index:

The Consumer Sentiment Index [CSI] is compiled at the University of Michigan and is a survey-based estimate of attitudes and expectations about consumers’ personal finances, spending and saving, employment, and the overall business climate. The Conference Board’s Consumer Confidence Index is a similar estimate of consumer perspectives.

consumer sovereignty:

Consumer sovereignty is the view that each people is individually the best judge of what makes him or her better off, and that the composition of output and the structure of prices is ultimately determined by the aggregated decisions of consumers.

consumer surplus:

Consumer surplus is the gain consumers derive from differences between the amounts of money they would willingly pay to consume alternative quantities of a good and the smaller payments required for them to consume those quantities of the good. Graphically, the area below consumers’ demand curves but above the price line approximates consumer surplus. Click on the link for a more in-depth look at consumer surplus. For a more mathematically precise view of this broad concept, see our discussion of compensating variation.

consumerism:

Consumerism, also known as materialism, is a term used to describe the effects of equating personal happiness with buying and using material.

consumption:

Consumption usually connotes spending by households for goods that gratify human wants. In macroeconomics, the total of all consumers’ spending is also termed consumption. In discussions of economic growth, however, “consumption” sometimes refers to any current use of goods or resources that “uses-up” (absorbs) the goods or resources so that they are not available at a later time, in contrast to “saving” or “investment,” by which goods or the services of resources are available at later points in time. Thus consumption and saving are not differentiated by whether private households or government spend, but rather by whether the goods are “used up” now or later. In this approach, C + I = C + S = Y = GDP. See also saving and investment.

consumption function:

A consumption function is a mathematical relationship between consumer spending and disposable income (the Keynesian version) or between consumer spending and wealth (a theory developed independently by Nobel Prize winners Milton Friedman and Franco Modigliani). See also Keynes’ fundamental psychological law of consumption and permanent income hypothesis.

consumption possibilities frontier:

A consumption possibilities frontier (CPF) is a curve connecting the various consumption possibilities that confront an economy, assuming that technology is fixed and that all resources are fully and efficiently employed. The consumption possibilities function is identical to the production possibility frontier of a nontrading economy; expansion of trade expands consumption possibilities.

consumption tax:

A consumption tax is born by consumers and is based on resource end-use, instead of being based on potential claims to resources (income or wealth). Our current income tax system could be converted into a progressive consumption tax by allowing all saving as a deduction from taxes. This would effectively replacing income taxes with a tax on consumption alone.

contagion:

Contagion is the transmission of economic prosperity or stagnation between regions or countries. For example, if the United States experiences a recession, it is highly likely that because of the huge relative size of the U.S. market, many of our trading partners will also experience recessions that will vary in severity by the extent of their reliance on exports to the American market.

contango:

Contango is the term applied when the contract price promised in a futures market upon delivery of an item is higher the more distant in time the delivery will occur. This is a normal condition, just as the curve illustrating the yield to maturity of financial instruments is normally positively sloped. For example, a Treasury bond normally sells at a larger discount and yields a higher interest rate if it will mature at a later point in time. Thus, the current (spot market) price of a 10-year-bond that will mature in five years is less than the face value of the bond, which is the price that will be paid to redeem the bond at maturity. Positive interest rates combined with risk aversion by buyers normally yields a higher future price than the spot price for most goods and resources. Backwardation is the term applied to the abnormal structure of prices when the contract price is higher the closer in time is the promised delivery date of the item.

contestable market:

A contestable market is one for which barriers to entry are largely absent in the long run.

contestable markets theory:

Contestable markets theory suggests that all advantages of pure competition as a market structure are realized if freedom of entry and exit exists, and that the number of firms currently in a market is less important for efficiency than the threat of potential new entrants. See also rivalry, competition, atomistic competition, pure competition, and perfect competition.

contingency clauses:

Contingency clauses in contracts make the timing and amounts of future payments by a principal contingent upon the performance of the agent in accomplishing certain tasks or delivering certain products in prespecified ways.

contingent behavior:

Contingent behavior is behavior that reflects each agent’s actions depending on expectations about the behavior of all other agents in an activity or game.

contingent labor force:

Contingent workers are usually underemployed and include part-time employees, employees in business services, self employed and temporary workers. See also underemployment.

contingent valuation:

Contingent valuation is an attempt to skirt the free rider problem by using questionnaires or other indirect techniques to estimate the willingness of individuals to pay for public goods.

continuous random variable:

A continuous random variable has values that correspond to all possible measures between any two points on a straight line along which the variable is measured. Continuous variables are infinitely divisible. Height, weight and income are examples of continuous variables when cardinal measurement is used. Freedom or beauty are examples of subjective and ordinally measurable continuous variables. Contrast with discrete variables, which are not infinitely divisible, and which include such things as population or cars or pregnancy.

contract:

A legally enforceable agreement between two parties or more parties. Among other requirements, legal contracts must entail expectations of gain [consideration] for all parties.

contraction (recession):

A contraction is a decline in economic activity; unemployment and inventories rise unexpectedly. See also depression and contrast with recovery and expansion.

contractionary policies:

Contractionary policies are intended to decompress demand-pull inflationary pressure by decreasing the amount of money in circulation, by increasing taxes, or by decreasing government spending.

contribution pricing:

Contribution pricing is a pricing strategy in which the price charged is based on the variable costs of production. The price is set to exceed average variable costs, so that a contribution is made towards fixed costs. Contribution pricing strategies maximize profit only if they yield conformity to the MR=MC rule, and can never be a loss-minimizing strategy. See also mark-up pricing.

contribution standard:

The contribution standard is the idea that income should be distributed according to the productivity of the resources one owns.

conventional mortgage:

A conventional mortgage is a loan secured by real estate and upon which the nominal rate of interest does not vary. See also adjustable rate mortgage and balloon payment.

conventional wisdom:

The term conventional wisdom was proffered by John Kenneth Galbraith to describe widely held but inaccurate structures of belief. For example, the conventional wisdom in Europe prior to Copernicus was that the Earth is flat, and the conventional wisdom prior to John Maynard Keynes was that prudence requires the federal budget to be balanced each time the Earth circles the sun.

convergence hypothesis:

1.         The convergence hypothesis is the view that nations that have low levels of productivity will have higher rates of productivity growth than nations with higher starting levels of productivity. The theory hinges on the notion that technologies developed at high cost in advanced countries will be assimilated at much lower cost in the less developed countries the low producing countries can learn from the high producing ones.

2.         A Soviet economist named Lieberman theorized in the 1950s that capitalistic and socialistic countries would become increasing similar across time, a forecast that became known as the convergence hypothesis.

convertibility:

Convertibility refers to the right (option) of a holder of a corporate bond or share of preferred stock to convert these securities into common stock at a fixed ratio or price during a specific period. The option to convert enables a bondholder, for example, to share in a firm’s success if the price of common stock rises. These options to convert these securities makes them more attractive to financial investors and consequently lower the costs of financial capital to the issuing firm.

convex hull:

Any polynomial used to describe the surface of a set can be bounded by a convex hull, regardless of its surface irregularities, if it can be fully enclosed within a convex set. Such convex sets are called convex hulls.

convex set:

A mathematical set is locally convex if straight line segments between points on the surface of the set contain only points on the interior or surface of the set. A set is strictly convex if all points on all line segments between any two points on its surface are internal to its surface, the sole exceptions being the two end points on the surface. Strictly convex sets have surfaces that are everywhere twice differentiable, which makes such sets ideal for specifying conventional economic theories that are mathematically well-behaved.

coordination game:

All agents in a coordination game derive their highest payoffs if they simultaneously choose the same strategy. In these games positive network externalities exist that incentivise all agents to prefer the case in which all agents make the same choice, but no agent has any fundamental reason to prefer any one of the available options over all others. Suppose, for example, that two carmakers are each trying to build hybrid cars, and that several alternative battery systems are each equally efficient and cost effective. If both carmakers adopt the identical system, only one type of specialized equipment will be required at the shops spread around the country that service these batteries. Both carmakers are otherwise indifferent between these battery systems, so it is in the interest of both to adopt the same system, and a Nash equilibrium exists when both choose the same strategy. See the coordination game link for an illustrative payoff matrix.

cooperative:

A cooperative is an organization that either attempts to negotiate lower prices when potential buyers who are members of a buyers’ cooperative pool their funds to enhance their market power, or markets the products of members of a sellers’ cooperative with the objective of enhancing the collective market power of these producers or reducing their costs by exploiting economies of scale in distribution.

cooperative games:

Agents engaged in cooperative games can form coalitions and make binding agreement.  See also game theory and contrast with e.g., prisoner’s dilemma.

co-pay:

See coinsurance.

copyright:

A copyright is an exclusive legal right granted to an author to reproduce and sell their works, e.g., books, musical compositions, films, or other works of art. Copyrights now extend to 70 years past the author’s death.

core inflation:

Core inflation (or built-in inflation) is a measure of inflation intended to identify a “base line” rate of aggregate price change that excludes food and energy price changes because their volatility may not reflect longer term trends caused by built-in expectations of inflation or macroeconomic policies. Food prices are excluded because harvests are sensitive to temporary changes in weather patterns, and energy prices are excluded because the price of oil is affected by political instability in the Middle East.

corn laws:

Corn laws were tariffs on grain imported into England in early 19th century. Reducing the supply of grain in England raised the price of grain increased the value of English farmland. Debates between David Ricardo and Thomas Malthus on the costs and benefits of free trade pivoted around the corn laws.

corporate income:

Corporate income is one of the categories of the national income. Much of this category actually represents the interest forgone had stockholders bought bonds instead of stock. Corporations use corporate income [their net revenues] in three ways. First, they must pay corporate income taxes. Second, they may pay stockholders dividends from their after-tax income. Finally, remaining profits are kept in the firm as working capital or to finance either internal expansion or external acquisitions (mergers and takeovers).

corporate income tax:

The corporate income tax is a tax on the net revenues of a corporation, but there is controversy about whether the tax burden is ultimately borne by stockholders, resource suppliers (e.g., employees), or the final consumers of the goods the corporation produces. See also forward shifting, backward shifting, and tax burden.

corporate paper:

Corporate paper is another term for a corporate bond, or a bond issued by a corporation. There are several ways for a corporation to raise money. One common way is by issuing common stock; issuing corporate paper is just another way to raise funds. They are generally (at least in America) more risky than government bonds, and thus carry a higher rate of return (also known as the interest rate or coupon rate).

corporate profit:

See corporate income.

corporate raiders:

Corporate raiders are individuals or organizations that attempt to wrest the governance of a corporation from its current managers, or to buy a corporation and merge it into an existing corporation.

corporation:

A corporation is an organization formed under state law that is considered a legal person distinct and separate from its owners. Click on the link for an explanation as to why corporations are established.

Corps of Engineers:

The Corp of Engineers is a branch of the US Army that regulates development and oversees construction along rivers, harbors, and waterways.

correlation:

Correlation exists (either positively of negatively) when a change in one variable is consistently related to a change in another variable. Correlation may or may not be causal, however, because both variables may in fact be caused by a third (missing) variable, or the correlation may be spurious – a purely random statistical artifact.

correspondent bank:

A correspondent bank accepts deposits for and performs banking services for another depository institution. Agreements to reciprocate are usual, specifying which services a bank will perform for a correspondent bank.

cost containment:

The term cost containment refers to actions taken by health care providers that are intended to improve efficiency by controlling imbalances in the production, distribution and utilization of health care services that cause unnecessarily high costs.

cost-benefit analysis:

See benefit-cost analysis.
See Cost of Holding Money

cost-of-living (indexing) clauses:

A cost-of-living clause (indexing) is a contractual agreement that future payments will be adjusted to compensate for changes in the purchasing power of money, usually as measured by the Consumer price index (CPI). Income tax brackets and Social Security benefits, for example, are regularly adjusted for changes in the cost of living. Cost of living clauses are also known as escalator clauses or indexation.

cost-plus pricing:

In a system of cost-plus (mark-up) pricing, firms mark costs up by a fixed percentage to set their prices. Contrast with competitive or marginal revenue = marginal cost pricing. Cost-plus pricing is a cornerstone of some supply-side theories of inflation, and is consistent with the “satisficing” behavior hypothesized by Nobel-Prize winner Herbert Simon and some recent models developed by behavioral economists.

cost-push inflation:

Upward price level movements that originate on the supply side of the economy; cost-push cycles of inflation generate clockwise adjustment paths of inflation versus real output.

costs:

The costs of any good or activity are the values of the next best opportunities foregone.

costs of unemployment, economic:

The economic costs of unemployment include the value of the output unemployed workers could have produced were they employed.

cost-shifting:

Cost-shifting when the costs of benefits to one individual are paid for by other individuals. For example, cost-shifting occurs when patients who pay less than the full costs of their medical care are subsidized through higher charges to patients who have insurance or who pay the full costs of treatment. Cost shifting is also known as cross subsidization.

Council of Economic Advisors:

The Council of Economic Advisors (CEA) was established by the Employment Act of 1946. The three members of the CEA serve as the President’s chief economic advisers.

countercyclical:

A government policy or private activity is countercyclical if it reduces the volatility or the undesirable effects of business cycles.

counterfeit:

Noun: An illegal copy of an item, usually currency. Verb: To counterfeit is to illegally copy an item, usually currency or intellectual property, e.g., a DVD.

counterfeit goods:

Counterfeit goods (or knock-offs) are products produced by a firm and intended to emulate popular products produced by another firm. In some cases, the product design is inadequately protected by patents, copyrights, or trademarks, but in many cases counterfeit goods do violate the legal rights of the producers of the original product. See also piracy.

countervailing power:

The theory of countervailing power was advanced by John Kenneth Galbraith and is the expectation that the activities of any powerful social, political or economic entity or group will eventually generate an opposing entity or group that will offset the social and economic distortions caused by the initial entity or group. For example, the collusive exercise of economic power by a group of firms with significant market power will, in Galbraith’s theory, predictably yield an opposing group, such as a powerful labor union. Galbraith intended his theory of countervailing power, which draws heavily dialectics, as an alternative to the standard “invisible hand” theory of competition that dates back to Adam Smith.

Cournot competition:

In Cournot competition, each firm in an oligopoly expects all its rivals to adjust their prices to ensure that all their output is sold, but each adjusts output assuming that rivals will keep their quantities constant. Unlike Bertrand competition, Cournot competition yields and equilibrium that may be profitable. An early duopoly version of this model was developed by Antoine Augustin Cournot (1801-1877). See also Bertrand competition.

Cournot, Antoine Augustin

Antoine Augustin Cournot (1801-1877) is remembered as an early theorist who established marginal revenue equals marginal cost as a necessary condition for profit maximization, specified demand curves and supply curves mathematically, and pioneered game theory with his theory of duopoly.

cover:

The verb “cover” means to complete or to ensure the completion of a transaction. For example, a winning bidder may cover a successful bid at an auction by making a bank deposit to “cover” a check, or bookie may “cover” (make offsetting bets) in another market (the opposing team’s city) to hedge a betting frenzy in the bookies’ local market (the home team’s city).

CPI:

See Consumer Price Index.

craft union:

A craft union (or trade union) is a labor union organized for a specific skilled occupation whose members may not even work in the same industry. Craft unions exist for printers, electricians, and musicians, for example. Contrast with industrial union.

creative destruction:

Creative destruction is the term Joseph Schumpeter used in his book, Economic Development, to described the impact of major entrepreneurial innovations on economic activity. By this term, Schumpeter meant that some industries and jobs become obsolete when innovation creates more competitive and efficient new industries and jobs. For example, typewriters and typewriter repair technicians were made obsolete by the emergence of the personal computer industry. See also churn.

creative response:

A creative response is a profit-oriented institutional change precipitated by changes in laws and regulations. Creative response is especially common in financial markets, in which new institutions and new forms of assets are generated rapidly when old regulations are “reformed” or new regulations are aimed to limit certain activities. Loophole mining can also be viewed is a creative response to changes in tax laws. Every change in tax laws quickly generates activity by armies of lawyers and accountants to discover loopholes that reduce tax liabilities.

credence good:

Significant uncertainty about how consumers might benefit from some goods, called credence goods, causes reliance on people reputed to have expertise about the specific goods. For example, pharmaceuticals or health care are often credence goods because people rely on health professionals for expert procedures and clinical advice about the costs and benefits of health care. This asymmetric information raises the possibility of inefficiency caused by principal-agent problems.

credentialism:

“Credentialism” is the process in which prospective job applicants build resumes to signal that they satisfy requirements (screening) by employers for degrees and certificates as indicators of diligence and work ethics, despite the fact that these credentials often seem to have little or nothing to do with the job vacancies the applicants wish to fill. A Michael Spence won a share of the Nobel Prize for Economics in 2001 in part for his analyses of the roles of credentials in screening and signaling as mechanisms firms and employees confront as a consequence of asymmetric information and other imperfections in the quality of information available. See the link to credentialism for more discussion.

credit:

Credit is a promise to pay at some future date that is exchanged for goods, or in the case of a loan, for money.

credit constraint effect:

The credit constraint effect is the reduction in activity by a firm when prices fall for its outputs and the amount of debt it owes is constant. This effect is a consequence of the decline in the firm’s real income and real net worth (adjusted for price-level changes).

credit crunch:

A credit crunch occurs when interest rates rise rapidly and potential borrowers have extreme difficulty in securing credit because credit rationing has increased dramatically, usually because of unexpected contractionary monetary policies, or because lenders have much more extremely risk averse.

credit default swamp (CDS):

A credit default swap (CDS) is effectively an insurance instrument guaranteeing that if a specific firm becomes bankrupt or, more commonly, if a debtor defaults (fails to make a stated payment when due), the seller of the CDS will pay the holder of the CDS a specified amount. The holder of the CDS is neither required to own stock in the bankrupt firm, nor to be owed the defaulted indebtedness. The buyer of a CDS makes periodic payments (effectively, insurance payments) and receives compensation from the seller in the event of a default on the debt instrument. Credit default swaps are financial derivatives that can be bought and sold without regard to who owes or is owed particular funds, and unless significantly collateralized, these derivatives entail significant risk. Major reasons for the financial crisis of 2008-2010 included inadequate collateralization of credit default swaps backed primarily by underwater sub-prime mortgages. See also mortgage backed securities.

credit markets:

See financial markets.

credit rationing:

Credit rationing occurs when financial institutions will not make loans even if applicants turned down for loans are willing to pay interest rates equal to or greater than interest rates charged successful borrowers who present similar risks of default. Credit rationing is often based on screening, and in many cases, intermediaries are accused of illegally discriminating on the basis of race or gender. Credit rationing tends to increase during economic downturns, and it is also often a predictable result of usury laws (interest rate ceilings) for applicants with low incomes or weak credit histories. See also loan shark and usury laws.

credit scoring model:

A credit scoring model is a set of equations that predicts the likelihood of repayment by prospective borrowers with certain characteristics, such as income, employment, and previous credit history, based on the statistically typical behavior of other people with similar characteristics.

credit union:

A credit union is a non-profit, cooperatively run financial institution owned and operated by its members who deposit or borrow funds from the organization. Credit unions typically provide the same services as banks, such as checking and savings accounts, certificates of deposit, online banking, credit cards etc. Credit unions are exempt from federal and state taxes, typically offer loans to members at relatively low interest rates, and pay relatively high interest rates on the shares (deposits) of members.

creditor:

A creditor is an individual or firm that lends money or provides a service in expectation of future payment.

creeping inflation:

Inflation is categorized as creeping when the average level of monetary prices rises at only moderate positive rates, usually less than “double digits” (>10%) annually. See also galloping inflation (>10% annually) and hyperinflation (>50 monthly).

crony capitalism:

Crony capitalism is a system in which government officials grant profitable franchises and licenses to family members and political allies. This system is especially common in developing nations and it foster inefficiencies, corrupt business practices, and de facto monopolies.

cross elasticity of demand:

A cross elasticity of demand is a measure of the responsiveness of the quantity demanded of one good to changes in the price of another. It is computed by dividing the relative change in quantity demanded of a good by the relative change in price of another good. This is roughly: %ΔQx ∕ %ΔPy, and is positive for substitute goods, but negative for complementary goods. See arc elasticity for a guide to a more precise formula.

cross licensing:

Cross licensing is the process of one firm agreeing to share its patent with another firm, usually in exchange for cash or the rights to use a patent belonging to the second company.

cross subsidization:

Cross subsidization is a form of price discrimination in which one group of buyers pays a higher price, enabling lower prices for other groups of individuals. In medicine, for example, patients with health insurance and their insurers may pay relatively more for services, enabling the provision of medical care to indigent patients.

crowding-in:

Crowding in is the increase in private investment or private consumption induced by the multiplier-accelerator process when government spending financed by deficits stimulates increases in national income and output. Open the file fiscal policy and the great depression for an example of how crowding-out may be a moot issue if the economy is operating below capacity. Contrast with crowding-out.

crowding-out hypothesis:

The crowding-out hypothesis is the idea that increases in federal spending inevitably cause reductions in private consumption or investment. For example, increases in government borrowing to cover a budget deficit may increase interest rates, reducing investment. The absorption problem is a generalization of the crowding out hypothesis, and summarizes how crowding out may cross international borders. The crowding-out hypothesis assumes that the economy is initially at a full employment level of output. See also absorption problem, twin deficit problem and crowding-in.

crude quantity theory of money:

The crude quantity theory of money is a theory that the price level (P) is exactly proportional to the nominal money supply (M).

currency:

The term “currency” refers to coins and paper money.

currency appreciation:

Under a flexible (floating) exchange rate system, an increase in the exchange rate of a currency relative to foreign currencies.

currency depreciation:

Under a flexible (floating) exchange rate system, a decrease in the exchange rate of a currency relative to foreign currencies.

currency peg:

Currency peg is when a national currency is compared, by legislation, to another currency outside of that particular nation. See also currency board.

current account balance:

In the balance of payments, the current account balance is the difference between a country’s total exports of goods and services and its imports of goods and services. Current account balances exclude transactions in financial assets and liabilities, which are summarized in the capital account.

current yield:

The current yield of a bond is its annual coupon payment divided by the bond’s market price. For longer term bond’s, this value is often used an approximation of the bond’s yield to maturity as it is easier to calculate. The longer the bond’s maturity and the closer the bond’s market value is to its par value, the better the current yield is as a predictor of the bond’s yield to maturity.

customs duties:

See tariffs.

customs union:

A customs union is created when a group of countries eliminate all trade barriers on each other, but impose identical tariffs or shared quotas when dealing with external countries.

cyclical deficit:

The cyclical deficit is the difference between government revenues and outlays that emerges because the macroeconomy is operating below its potential. See also structural deficit.

cyclical unemployment:

Cyclical unemployment is unemployment that occurs because of a downturn in economic activity – a recession or depression, for example.