Top 10 Terms to know about, in Economics

One thing that all economists agree on is how big and unpredictable the economy is. However, over time, economists have established a few straightforward but broadly applicable rules that are helpful when attempting to comprehend everything from the decisions made by normal individuals to the operation of extremely complex markets.

 

Economists examine how resources are distributed for production, distribution, and consumption on the premise that humans have limitless demands in a world of finite resources. While macroeconomics focuses on the behavior of the economy as a whole on an aggregate level, microeconomics focuses on the decisions made by people and enterprises.

 

Hesiod, a Greek farmer, and poet who lived in the eighth century B.C. are one of the oldest economists known to have written about the necessity for effective allocation of labor, resources, and time to combat scarcity. The first modern Western economic ideas emerged with the publication of Adam Smith's book An Inquiry Into the Nature and Causes of the Wealth of Nations in 1776.

 

A nation's economic performance is described through economic indicators. Economic indicators are often released by governmental agencies or private groups and frequently have a significant impact on stocks, employment, and worldwide markets. They also frequently forecast future economic circumstances that will affect markets and influence investment choices.

 

10 Basic Terms Used in Economics

 

Economics is a social science, making it one of the most fascinating and contentious topics in the world. For this reason, it is still one of our most popular summer courses.

 

Anyone interested in learning more about the topic should first familiarize themselves with some of the vocabulary and most often used concepts in the field, whether they want to pursue it as a course of study at A-Level or university or are just doing so out of curiosity.

 

The fact that there are so many economic words to learn and comprehend within the topic, however, is one of the subject's challenges. With origins dating back to the late 18th century, this field has had significant advancement since then, with much of our everyday lexicon, concepts, and ideas now being engrained in it.

 

We've collected a list of some of the most fundamental economics phrases (with meanings) to give learners a head start and help them build solid foundations in the discipline. After reading them, you'll be motivated to explore a world of endless learning and discovery.

 

10 basic terms that are widely used in the field of economics are listed here:

 

1. Gross Domestic Product (GDP):

 

In order to assess a country's economic activity and success in a broad sense, analysts typically look at its gross domestic product (GDP), GDP essentially refers to the total monetary worth of all finished products and services produced within a nation's boundaries during a specified time period.

 

A short but accurate way to assess a nation's economic health is to look at its total productivity, which is straightforward to compare to past reports and to other nations that have previously been in comparable economic circumstances.

 

The Gross Domestic Product (GDP), which is often estimated on an annual basis, can also be carried out on a quarterly or even monthly basis to provide a more detailed view of a given time period.

 

2. Gross National Product (GNP):

 

Gross national product (GNP), which is related to GDP, is another crucial economic indicator used to determine a nation's development or decline. A country's people's entire output of finished products and services is estimated to be worth this amount.

 

It is often determined by subtracting the total of all personal consumption expenditures—private domestic investment, government spending, net exports, and any income from residents' abroad investments—from the total of all international residents' income inside the nation's economy.

 

Simply said, to calculate GNP, start with GDP, add the money from overseas investments generated by a country's citizens, and then deduct the income from domestic investments made by foreign citizens.

 

3. Interest rates:

 

When a person, group, or nation borrows money, products, or property, the lender often seeks to profit from lending them the money for the time being, especially because they are providing it as a kind of assistance to others rather than investing it to make money. To put it another way, they bill the borrower for the use of an asset. Therefore, they will add an interest rate to the loan they are providing.

 

An interest rate is the fraction of a loan, represented as a percentage of the outstanding loan, that is added to the amount lent. The annual percentage rate (APR) is the term used to describe interest rates that are typically determined annually.

 

The majority of lending transactions involve interest rates; whether it's obtaining financing for a house purchase, starting a business, or even paying for college tuition, most of us will borrow money at some time in our lives and pay interest as a result.

 

4. Inflation:

 

You'll come across the word "inflation" a lot when studying economics. It describes the gradual loss of a currency's buying power over time, which raises the cost of living. In its most basic form, inflation is just a rise in the cost of products and services that we purchase.

 

A helpful approach to thinking about it is to picture a basket filled with certain items you frequently purchase, such as milk, bread, chocolate, etc. If you were to review your receipts and discover that the same basket of items cost less a while ago but now costs more, inflation has taken place.

 

The increase, which is sometimes stated as a percentage, basically indicates that you can purchase less with one unit of money than you could previously. However, in economics, inflation isn't necessarily a bad thing. People who own assets like real estate, for instance, will be pleased if inflation increases the value of their asset, increasing the amount they would get if they sold it.

 

5. Financial markets:

 

The phrase "financial markets" refers to any market where financial assets can be purchased and sold, which is a pretty broad definition. For instance, selling stocks, bonds, or currencies.

 

Capitalist economies are supported by financial markets, which enable corporations and entrepreneurs to acquire and sell their financial assets. As a result, they develop financial products that give investors a return and then make them available to those who need more cash (borrowers).

 

A stock exchange, like the New York Stock Exchange (NYSE), is a typical illustration of a financial market that you may already be familiar with. The NYSE transacts trillions of dollars daily by buying and selling shares of publicly listed firms.

 

6. Bear Market:

 

In stock markets, the price of a stock typically reflects the likelihood that a company will generate cash flow and profit in the future. But stock values may start to decrease when prospects start to fade and expectations drop.

 

When prices are experiencing a sustained decrease, the phrase "bear market" is frequently used to indicate this pessimism or pessimistic perspective on a stock market's performance.

 

This phrase is commonly used to refer to when a whole market or index declines, but it may also be used to refer to when the values of certain securities fall by at least 20% over a prolonged period of time, usually two months or longer.

 

The quantity of stocks that are sold often rises during bad markets. As prices decline during a bear market, investors frequently turn to short-selling or put options to attempt to earn money. Similarly, people who own stocks in corporations sometimes want to sell their shares in order to prevent losing a sizable portion of the value of their initial investments.

 

7. Bull Market:

 

A "bull market," as opposed to a "bear market," denotes a significantly more upbeat perspective on a market's current performance, suggesting that stock prices have risen or are anticipated to do so in the near future.

 

Although a stock market is often meant when the phrase is used, it may also apply to anything else that is traded, such as bonds, money, and real estate.

 

Similar to a bear market, the word is commonly used to refer to long stretches of rising security prices, usually lasting months or even years. This is due to the fact that the values of securities frequently fluctuate throughout a trading period—sometimes several times each day!

 

8. Law of Supply and Demand:

 

A theory called the law of supply and demand is used to describe how sellers and purchasers of a certain good, service or resource interact with one another. It describes the connection between a good's pricing and consumers' desire to purchase or sell it.

 

The law of supply and the law of demand serves as the foundation for this idea. The real market pricing and the number of commodities on a market are determined by the interaction between these two rules.

 

According to the law of demand, consumers will purchase less of an economic good when prices are high. The rule of supply also states that sellers will provide more of an economic product at greater costs.

 

In general, individuals are prepared to provide more and demand less when the price of products and services rises, and the opposite is true when the price of a thing declines.

 

Obviously, things are never that easy. In fact, there is a wide range of independent factors that may influence how supply and demand behave in the market, affecting both prices and the quantities we see in markets.

 

9. Monetarism:

 

According to the macroeconomic concept of monetary theory, governments can preserve economic stability by focusing on the pace of increase in the money supply.

 

It essentially says that the largest factor of economic development is the total quantity of money in a country's economy. The demand for products and services rises as money becomes more widely available. As a result, there are more job opportunities available, which lowers the unemployment rate and fosters economic growth.

 

A key proponent of the idea is the economist Milton Friedman, who believed that in order to support the economy's natural expansion, governments should maintain stable money supply levels and gradually increase them each year.

 

10. Free Market:

 

A system of economics known as the "free market" is one in which little to no government intervention exists and is based on supply and demand. A "laissez-faire" capitalist system, where people can freely purchase and sell things and the majority of businesses and properties are not held by the government.

 

In a free market economy, people and their spending habits often dictate how many products and services are produced. With legal frameworks that safeguard property rights rather than defining purchasing power, people are free to make the purchases they want and in the ways they desire.

 

Conclusion

 

Even if mastering the fundamentals of economic theory isn't regarded as being as crucial as managing a family budget or being a proficient driver, the factors that drive the study of economics have an influence on every aspect of our lives. At its most fundamental level, economics aims to explain how and why we choose the products we do.