Austrian School (also Vienna School):
A school of economics that emphasizes free markets, individual property rights, and freedom of association. It also calls for the abolition of central banks and a return to the gold standard. The school is based on principles postulated by the Austrian economist Carl Menger in the late 19th century.

Boom and Bust:
A recurrent cycle of growth, decline, recession, and recovery in the economic activity of a capitalist country. A bubble is a particularly unstable stage of this economic cycle, almost certainly followed by catastrophic collapse of the system.

Business Cycle:
A term used in economics to designate changes in the economy. Ever since the Industrial Revolution, the level of business activity in industrialized capitalist countries has veered from high to low, taking the economy with it. The timing of a cycle is not predictable, but its phases seem to be. Many economists cite four phases — prosperity, liquidation, depression, and recovery — using the terms originally developed by the American economist Wesley Mitchell, who devoted his career to studying business cycles.

Capital Flows:
Money that moves from one country to another in the form of investments or loans from private and/or government sources. Capital flow may provide a significant sum to a recipient country’s economy and is sometimes implicated in the boom-and-bust cycles that affect some countries.

An economic system in which private individuals and business firms carry on the production and exchange of goods and services through a complex network of prices and markets. Although rooted in antiquity, capitalism is primarily European in its origins; it evolved through a number of stages, reaching its zenith in the 19th century. From Europe, and especially from England, capitalism spread throughout the world, largely unchallenged as the dominant economic and social system until World War I ushered in modern communism (or Marxism) as a vigorous and hostile competing system.

Central Bank:
A financial institution, for example, the U.S. Federal Reserve Bank, whose function is to regulate state fiscal and monetary activities. It is responsible for the issue of bills and for controlling the flow of currency.

Central Planning:
In a centrally planned economy, the state has the authority to decide who produces what and at what price it will be sold. Prices and resource allocation are also decided by the central decision-making bodies. The goal is to make the economy more equitable, but the result is often increased waste and inefficiency. Centrally planned economies are also called command economies or planned economies.

Chicago School:
A school of conservative economic thought associated with the University of Chicago. It promotes free markets and capitalism and relies heavily on mathematical analysis..

A concept or system of society in which the major resources and means of production are owned by the community rather than by individuals. In theory, such societies provide for equal sharing of all work according to ability and all benefits according to need. Some conceptions of communist societies assume that, ultimately, coercive government would be unnecessary and therefore that such a society would be without rulers. Until the ultimate stages are reached, however, communism involves the abolition of private property by a revolutionary movement; responsibility for meeting public needs is then vested in the state.

A prolonged economic slowdown. A depression is marked by a steep decline in production and demand. As a result, stock markets drop, more companies go bankrupt, and unemployment rises. Governments try to avoid depressions by providing necessary stimuli, such as increasing the money supply or increasing government spending. The Great Depression of the 1930s, caused in part by trade wars, made it clear — even then — how interconnected the world economy is.

Official act reducing the rate at which one currency is exchanged for another in international currency markets. A government may choose to devalue its currency when a chronic imbalance exists in its balance of trade. Such a trade imbalance weakens the international acceptance of the currency as legal tender. Devaluation can only occur when a country has been maintaining a fixed exchange rate relative to other major foreign currencies.

Dependency Theory :
A theory of economic development that emerged in the 1960s. The theory suggests that economic relations between rich and poor countries — most notably trade, but also investment relations — have the inherent effect of enriching wealthy countries and further impoverishing poor countries. Dependency theorists advocate delinking — removing national economies from the flow of global trade and investment — wherever possible.

Economic Development:
The promotion of more intensive and more advanced economic activity through education, improved tools and techniques, increased financing, better transportation facilities, and creation of new businesses.

Economic Downturn:
A negative change in the economy, often resulting in increased unemployment and decreased investment and spending.


A government restriction or restraint on commerce, especially an order that prohibits trade in a given commodity or with a particular nation.

Emerging Markets:

Nations whose economies are transitioning or have recently transitioned from heavy state control to economic policies that are more market-oriented. These countries are often very attractive to outside investors.

The value of a piece of property over and above any mortgage or other liabilities relating to it. On a company’s balance sheet, equity refers to the part of a company that belongs to the shareholders after all liabilities have been subtracted from assets. A company’s net worth is called “stockholders’ equity.”


A modern political ideology that seeks to regenerate the social, economic, and cultural life of a country on a heightened sense of national belonging or ethnic identity. Fascism rejects liberal ideas such as freedom and individual rights and often presses for the destruction of elections, legislatures, and other elements of democracy. Despite the idealistic goals of fascism, attempts to build fascist societies have led to wars and persecutions that caused millions of deaths. As a result, fascism is strongly associated with right-wing fanaticism, racism, totalitarianism, and violence.

Fiscal Policy:
Government policy related to taxation and public spending. Fiscal policy and monetary policy, which is concerned with money supply, are the two most important components of a government’s overall economic policy, and governments use them in an attempt to maintain economic growth, high employment, and low inflation. Fiscal policy can be either expansionary or contractionary. It is expansionary or loose when taxation is reduced or public spending is increased with the aim of stimulating total spending in the economy, Fiscal policy is contractionary or tight when taxation is increased or public spending is reduced in order to restrict demand and slow down the economy.
Flight Capital:
Money that citizens, concerned about economic downturn, send to financial havens outside of their own countries. This money sometimes amounts to a large percentage of a country’s total wealth. Latin Americans, for example, during times of high inflation, often buy dollars and send them to bank accounts abroad, usually in defiance of exchange control laws. Attempts by government to control transfers of money abroad often end up encouraging the practice of capital flight — exactly what they are trying to avoid.

Foreign Debt:
Debt owed by governments or private companies to foreign lenders.

Foreign Direct Investment (FDI):

The total of all foreign investment in a country’s economy. It includes “green-field” investments such as new factories and power plants, and “paper” investments, such as shares of existing companies.

General Agreement on Tariffs and Trade (GATT):
A treaty and international trade organization in existence from 1948 to 1995. GATT members, known as contracting parties, worked to minimize tariffs, quotas, preferential trade agreements between countries, and other barriers to international trade. In 1995 GATT’s functions were taken over by the World Trade Organization (WTO), an international body that administers trade laws and provides a forum for settling trade disputes among nations.

Global Governance:
An international cooperative effort to expand trade and encourage global economic development — often associated with the International Monetary Fund (IMF).

Integration of the world’s culture, economy, and infrastructure driven by the lowering of political barriers to transnational trade and investment, and by the rapid proliferation of communication and information technologies. The term is often used in reference to the substantial impact of free-market forces on local, regional and national economies.

Gold Standard:
In economics, the monetary system wherein all forms of legal tender may be converted, on demand, into fixed quantities of fine gold, as defined by law. Until the 19th century, most countries of the world maintained a bimetallic monetary system. The widespread adoption of the gold standard during the second half of the 19th century was largely a result of the Industrial Revolution, which brought about a vast increase in the production of goods and widened the basis of world trade. The countries that adopted the gold standard had three principal aims: to facilitate the settlement of international commercial and financial transactions; to establish

stability in foreign exchange rates; and to maintain domestic monetary stability.

Gross Domestic Product (GDP):
The total value of all goods and services produced within a country in a year, minus the net income from investments in other countries.

Gross National Product (GNP):

A term used to describe in monetary value the total annual flow of goods and services in the economy of a nation. The GNP is normally measured by totaling all personal spending, all government spending, and all investment spending by a nation’s industry both domestically and all over the world. GNP can also be figured by the earnings and cost approach of accounting, in which are added together all forms of wages and income, such as corporate profits, net interest returns, rent, indirect business taxes, and unincorporated income.
Group of Seven (G7):
A group of the seven most industrialized nations in the world that met to discuss and draw up global economic policies; they were joined by Russia to form G8. The seven were Canada, France, (West) Germany, Italy, Japan, the United Kingdom, and the United States.

An economic and political forum for eight of the world’s most industrialized nations: Canada, France, Germany, Italy, Japan, Great Britain, Russia, and the United States. The group arose informally during the 1970s from the meetings of finance ministers arranged by President Valery Giscard d’Estaing of France and Chancellor Helmut Schmidt of West Germany (now a part of the unified Federal Republic of Germany). The two men invited other heads of government to join them in these meetings. The Group of Eight, known as the G8, now meets once a year to exchange information and ideas — particularly in economics — and to discuss matters of international concern.

In the most extreme form, chronic price increases become hyperinflation, causing the entire economic system to break down. The hyperinflation that occurred in Germany following World War I, for example, caused the volume of currency in circulation to expand more than 7 billion times and prices to jump 10 billion times during a 16-month period before November 1923. Other hyperinflations occurred in the United States and France in the late 1700s; in the USSR and Austria after World War I; in Hungary, China, and Greece after World War II; and in a few developing nations in recent years. During a hyperinflation the growth of money and credit becomes explosive, destroying any links to real assets and forcing a reliance on complex barter arrangements.

Import Substitution:
Governments sometimes use protective tariffs or quotas to force businesses and consumers to substitute imports with locally produced goods and services. This policy of import substitution is often implemented in developing countries in an effort to save precious foreign currency reserves and promote economic development.
R.C. Epping, A Beginner’s Guide to the World Economy, 3rd ed., New York, 2001.

Industrial Policy:
Governmental economic policy that is designed to direct investment in and development of a nation’s businesses and industry.

The pervasive and sustained rise in the aggregate level of prices measured by an index of the cost of various goods and services. Repetitive price increases erode the purchasing power of money and other financial assets with fixed values, creating serious economic distortions and uncertainty. Inflation results when actual economic pressures and anticipation of future developments cause the demand for goods and services to exceed the supply available at existing prices or when available output is restricted by faltering productivity and marketplace constraints. Sustained price increases were historically directly linked to wars, poor harvests, political upheavals, or other unique events. A financial institution such as an insurance company or pension fund that invests in securities.

International Monetary Fund (IMF):
An international economic organization whose purpose is to promote international monetary cooperation and facilitate the expansion of international trade. The IMF operates as a United Nations specialized agency and is a permanent forum for consideration of issues of international payments, in which member nations are encouraged to maintain an orderly pattern of exchange rates and to avoid restrictive exchange practices. The IMF was established, along with the International Bank for Reconstruction and Development (the World Bank), at the UN Monetary and Financial Conference held in 1944 at Bretton Woods, New Hampshire. The IMF began operations in 1947.


An economic philosophy put forth by British economist John Maynard Keynes. Keynesian economics calls for overspending, or “deficit spending,” during an economic slowdown, and underspending, or creating budget surpluses, during times of too-rapid economic expansion. (Keynes intended government to play a much larger role in the economy. His vision was one of reformed capitalism, managed capitalism — capitalism saved both from socialism and from itself. He talked about a “somewhat comprehensive socialization of investment” and the state’s taking “an ever greater responsibility for directly organizing investment.” Fiscal policy would enable wise managers to stabilize the economy without resorting to actual controls. The bulk of decision making would remain with the decentralized market rather than with the central planner.)

The study of an economy’s aggregate factors, such as growth, unemployment, inflation, and government spending. The other side of the economy, the “small picture” of individuals and firms, is called microeconomics..

Mixed Economy:
A mixed economy is one where the government does some planning and owns or controls more industries than in a free-market economy. Governments may own key industries such as steel, aviation, and banking, while the individual still plays an important role. Sweden and France are examples of mixed economies.

A school of thought that focuses on the money supply as a key determinant of the level of economic activity in a nation. Monetarists tend to view state economic actions as likely to disrupt domestic and international affairs. Monetarists tend, therefore, to be closely associated with economic liberals in their dislike of state influences.

Money Supply:
The total amount of money available in a given economy. The money supply may be measured in various ways, for example, as the total amount of currency in circulation combined with the money available in bank deposits.

A situation in which one company controls an industry or is the only provider of a product or service.
Multinational Corporation:
A large company that operates or has investments in several different countries

Austrian School (also Vienna School):
A school of economics that emphasizes free markets, individual property rights, and freedom of association. It also calls for the abolition of central banks and a return to the gold standard. The school is based on principles postulated by the Austrian economist Carl Menger in the late 19th century.

The governmental appropriation of property other than land from the domain of private property to national control. More specifically, the term designates the assumption by a nation of the ownership of privately owned industry, distributive enterprises, or other businesses or services. When applied as part of socialist or communist programs for abolition of private property, nationalization is sometimes known as socialization.

Non-Governmental Organizations (NGOs):

Non-governmental organizations (NGOs) are private organizations whose memberships and activities are international in scope. NGOs do not possess the legal status of national governments. However, the UN and other international forums recognize many NGOs as important political institutions. Examples of NGOs include the Roman Catholic Church, Greenpeace, the International Olympic Committee, and the International Committee of the Red Cross.

International Organization

North American Free Trade Agreement (NAFTA):
The trade agreement between the United States, Canada, and Mexico, signed in August 1992 and effective from January 1994. The first trade pact of its kind to link two highly industrialized countries to a developing one, it created a free market of 360 million people, with a total GDP of $6.45 trillion. Tariffs were to be progressively eliminated over a 10-to-15-year period and, as a result, investment into low-wage Mexico by Canada, the United States, and other foreign nations progressively increased. Chile was invited to join in December 1994.

Price Controls:

Government regulations setting the maximum price to be charged for goods or services.

Conversion of businesses from government ownership to private property. This can involve the denationalization of industry as well as allowing the private sector to provide what had been considered government services.
Property Rights:
A bundle of rights associated with ownership of a resource. Property rights include the right to use a resource and exclude other from its use, to gain from or control its use by others, and dispose of it. Property rights are defined by the state.

The theory of or belief in the advantages of restricting trade so as to encourage or benefit domestic producers.

In international trade, a quota is a limit on the quantity of a good that may be imported over a certain period. Contrary to tariffs, quotas are difficult to get around — the price of the good can’t be reduced to avoid them.

A decline in economic activity within an economy, usually characterized by higher unemployment and less investment in new plants and equipment

A measure taken by one or more nations to apply pressure on another nation to conform to international law or opinion. Such measures usually include restrictions on or withdrawal of trade rights, diplomatic ties, and membership of international organizations or forums.

Shock Therapy:
A policy of rapid economic reform. Its objectives include: (1) liberalization, or the abolition of government control over economic activities such as production, price setting, and distribution; (2) financial stabilization, or the imposition of deep cuts in government spending and firm limits on the growth of the national money supply; (3) privatization, or the transfer of most government-owned enterprises to the ownership of individuals and private companies; and (4) internationalization, or the opening of the economy to foreign trade and investment.

A political ideology incorporating a degree of socialism but including such values as private property and representative government.

An economic and social doctrine, political movement inspired by this doctrine, and system or order established when this doctrine is organized in a society. The socialist doctrine demands state ownership and control of the fundamental means of production and distribution of wealth, to be achieved by reconstruction of the existing capitalist or other political system of a country through peaceful, democratic, and parliamentary means. The doctrine specifically advocates nationalization of natural resources, basic industries, banking and credit facilities, and public utilities. It places special emphasis on the nationalization of monopolized branches of industry and trade, viewing monopolies as inimical to the public welfare. It also advocates state ownership of corporations in which the ownership function has passed from stockholders to managerial personnel. Smaller and less vital enterprises would be left under private ownership, and privately held cooperatives would be encouraged.

The act or process of invoking economic policies intended to stabilize an economy, typically one in the midst of a downturn.

Where economic stagnation meets inflation. Stagflation occurs in an economy with high inflation and low growth. This phenomenon rarely occurs, because inflation is usually the product of an overheated economy, not one that is stagnating. Stagflation is a worst case scenario where inflationary pressures are so strong that even an economic downturn is unable to quell the pressure toward rising prices.
State-Owned Enterprises:

Industries or companies that are owned by the government. These often include the transportation and communication industries, but may include any industry in which the government has a vested interest

Stop-Go Cycle:
Alternating deliberately between discouragement and encouragement of economic demand so as to control inflation.

Structural Adjustment:
An effort, usually in the form of revised economic policy, to reduce state control, introduce free market reform, and establish a foundation for economic growth.


Government payments intended to support a desirable enterprise or policy, usually one that is not viable or competitive under existing economic conditions.

Supply-Side Economics:
This theory, which became popularly known as “Reaganomics,” advocated a reduction in taxes and government spending in order to leave more money in the hands of citizens. According to supply-side theory, citizens would spend the money on products or services, which would give a boost to the economy, or they would invest the money in businesses, which would cause the economy to expand.

Taxes levied by a government on imports and exports. The money collected from tariffs is called a customs duty. Although tariffs are a source of government revenue, tariffs are also used as part of political and economic policies. For example, import taxes protect domestic manufacturing and agricultural industries from foreign competition by making imported items more costly.
Third Way:
A new form of socialism. Developed by Tony Blair’s Labor Party in Britain, the “Third Way” brought a free-market, pro-business aspect to the previously anti-growth party platform. It was modeled in part on Bill Clinton’s remake of the Democratic Party in the United States. The Third Way plan was followed by many socialist governments around the world, including Gerhard Schroder’s Democratic Socialist party in Germany.

Treaties:designed to facilitate trade between two nations or a group of nations. In the absence of trade agreements, many nations impose special taxes called tariffs and take other actions to discourage importation of foreign goods. Trade agreements usually seek to reduce or eliminate such barriers.
Trade Balance:
The sum of a country’s international purchases and sales of goods and services, plus all international financial transfers such as interest payments on foreign debt. These figures tell us which countries are running a trade deficit and which are running a trade surplus. The trade balance is also referred to as the current account.
Trade Barriers:
An impediment, such as a tariff or boycott, that a nation imposes to limit or burden trade.
Trade Liberalization:
Economic reform that puts more emphasis on free markets and less on government control.

Trade Union:
An association of workers established to improve their economic and social conditions. A trade union represents its members in determining wages and working conditions through the process of collective bargaining with the employer. When agreement cannot be reached, a union may conduct a strike against the employer. In many countries a union is the economic arm of a broad labor movement that may include a political party and a cooperative organization.

Transition Economies:
Economic systems that exist in countries undergoing dramatic shifts from one political or economic system to another.

Transparency International:

A Berlin-based organization that fights graft and bribery in the world economy by working with international organizations such as the Organization of Economic Cooperation and Development (OECD) to expose, investigate, and unmask corruption throughout the world.

Treaty of Rome:
A 1957 treaty signed by France, Britain, West Germany, Belgium, Luxembourg, and the Netherlands that established the European Economic Community in 1958.

Enforced idleness of wage earners who are able and willing to work but cannot find jobs. In societies in which most people can earn a living only by working for others, being unable to find a job is a serious problem. Because of its human costs in deprivation and a feeling of rejection and personal failure, the extent of unemployment is widely used as a measure of workers’ welfare. The proportion of workers unemployed also shows how well a nation’s human resources are used and serves as an index of economic activity.

World Bank (WB):
Specialized United Nations agency established at the Bretton Woods Conference in 1944. A related institution, the International Monetary Fund (IMF), was created at the same time. The chief objectives of the bank, as stated in the articles of agreement, are “to assist in the reconstruction and development of territories of members by facilitating the investment of capital for productive purposes [and] to promote private foreign investment by means of guarantees or participation in loans [and] to supplement private investment by providing, on suitable conditions, finance for productive purposes out of its own capital.

World Trade Organization (WTO):
International body that promotes and enforces the provisions of trade laws and regulations. The World Trade Organization has the authority to administer and police new and existing free trade agreements, to oversee world trade practices, and to settle trade disputes among member states. The WTO was established in 1994 when the members of the General Agreement on Tariffs and Trade (GATT), a treaty and international trade organization, signed a new trade pact. The WTO was created to replace GATT.

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