Glossary 1

GLOSSARY

Accounting Cost is the actual outlay on inputs into the production process.
Accounting Profits refer to revenue less cost. The level of accounting profit will be above economic profit
because opportunity costs are excluded from the calculation.
Affirmative Action means disadvantaged groups benefit from greater opportunity.
Aggregate Demand Curve shows real national output demanded at different price levels.
Aggregate Demand refers to AD = C + I + G + (X – M).
Aggregate Supply Curve shows the quantity of national output that firms are willing to supply at each
price level.
Allocative Efficiency is when all resources are allocated to their most efficient use, all markets are in
equilibrium, and the economy is operating on its production possibility curve. It is impossible to change
the allocation of resources in such a way as to make someone better off without making someone else
worse off. It implies all of the following: MSC = MSB, the sum of consumer and producer surplus is
maximised and P = MC, and no externalities exist.
Appreciation refers to an increase in the value of one currency relative to another currency. Appreciation
occurs when, because of a change in exchange rates, a unit of one currency buys more units of another
currency than it did previously.
Assets Demand refers to the demand for money for precautionary and speculative purposes.
Average Cost (AC) or (ATC) refers to the cost per unit. AC = AVC + AFC or TC ÷ Q.
Average Cost Pricing refers to when the price is regulated to P = AC to ensure that normal profits are
earned.
Average Fixed Cost (AFC) refers to AFC = TRF ÷ Q.
Average Revenue (AR) refers to the average contribution to total revenue to each unit sold. AR = TR ÷
Q.
Average Variable Cost (AVC) refers to AFC = VC ÷ Q.
Balance of Payments is a statement that records the value of New Zealand’s transactions with the rest of
the world. It is divided into three parts: the Current Account, the Capital Account and the Financial
Account. The Balance of Payments is made up of a number of balances (not one) and items must be
correctly recorded in the appropriate balance. The last major revision occurred in June 2001.
Balance of Goods (or Merchandise Trade Balance) refers to all transactions involving goods
between residents and non-residents.
Balance of Income refers to earning from the use of factors of production (land, labour and
financial capital). It includes investment income derived from ownership of international financial
assets, e.g. dividends, interest earned/paid on foreign loans.
Balance of Services refers to all transactions involving services between residents and non-
residents, e.g. transport services (shipping, land, aircraft), travel, communication, royalties and
licence fees.
Balance on Current Transfers refers to when resources are provided with no exchange of goods or
services, e.g. foreign aid, benefits and pensions.
Balance on Invisibles (BOP) is made up of the balance of services, the balance on net investment
income and net transfers.
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Balance on Merchandise Trade (BOT) refers to export receipts less import payments.
Capital Account refers to all transactions that involve the receipt or payment of capital transfers and
the acquisition and disposal of non-produced non-financial assets, e.g. debt forgiveness, migrant
transfers.
Current Account measures all transaction (other than those involving financial assets or liabilities)
between residents and non-residents.
Financial Summary Account refers to transactions associated with a change in ownership in
international financial assets and liabilities, e.g. direct investment, portfolio investment, reserve
assets.
Barriers to Entry refers to the ability to exclude potential competitors from entering an industry.
Examples include control of inputs, capital requirements, scale economies, cost advantage, and high set-
up costs.
Benefit refers to a payment as defined under Part I of the Social Security Act 1964 (e.g. Unemployment,
Sickness Benefit, New Zealand Superannuation, Veteran’s Benefit, Accommodation Supplement,
Disability Allowance).
Breakeven Point refers to where a firm is covering all its costs of production. TR = TC.
Budget Deficit refers to the amount each year by which government spending is greater than government
income. Expansionary fiscal policy where G > T.
Budget Surplus means a contractionary fiscal policy where T > G.
Business Cycle refers to patterns of booms and recessions in the level of economic activity.
Capital Account records the capital flows into and out of a country (e.g. New Zealand) for the public and
the private sector.
Capital Goods refer to producer (human-made) goods used in the production of other goods and services.
They include goods that are still in the production process and also finished goods waiting to be sold.
Income to owners of capital good is interest.
Capital Utilisation is the percentage of the economy’s total plant and equipment that is currently in
production.
Cartel refers to any combination of firms or other groups (e.g. countries) whose objective is to limit the
level of competition within a particular market. OPEC is an example.
Census counts a person as being unemployed if they say they are out of work and actively seeking it,
whether full-time or part-time.
Central Bank the principal monetary authority of a nation (e.g. Reserve Bank of New Zealand). Central
banks perform several key functions, including issuing currency and regulating the supply of credit in the
economy. In New Zealand, the Reserve Bank also administers monetary policy as prescribe by the Policy
Targets Agreement.
Ceteris Paribus (CP) indicates that all the other factors remain constant, so that the relationship between
key variables can be investigated. CP is an assumption used in the most economic models.
Change in Demand refers to a shift in the demand curve due to a change in one or more of the
determinants of the demand curve, not including the price of the commodity. This shift causes a different
quantity to be demanded at every price (i.e. either greater or less than previously demanded at every price.
Change in Quantity Demanded refers to a movement along a stable demand curve due to a change in the
price of a commodity.
 Glossary 3

Change in Quantity Supplied refers to a movement along a stable supply curve due to the change in the
price of a commodity.
Change in Supply refers to a shift in the supply curve, due to a change in one or more of the determinants
of the supply curve, resulting in a different quantity supplied at every price. The price of the commodity
is not one of the determinants of the shift of the supply curve.
Child refers to an unmarried person under the age of 18 years, other than a person who is aged 16 years or
17 years and financially independent.
Circular Flow Diagram is an economic model that helps illustrate the money flows between the different
sectors in the economy.
Collective Goods are provided free of charge and are paid for collectively, through the tax system.
Collusion refers to a secret, explicit agreement to set prices.
Commerce Commission is a Government agency that maintains competition in the market.
Commodity refers to a good, service or resource produced to satisfy needs and wants. Commodities can
be traded in a market.
Comparative Advantage is the principle that nations should specialise in the goods they produce most
efficiently, compared to other nations. Even if a nation is technically efficient in the production of all
goods it can gain from trade by specialising in the good that it makes relatively better (i.e. with least
opportunity cost).
Complementary Good is one that that can be used in conjunction with another good (e.g. cars and petrol),
or goods that must be used together in order to fulfil one function (e.g. pen and ink).
Constant Costs are the opportunity cost of producing more of one good, in terms of another good, stays
the same. PPC is shown as a straight line.
Constant Returns means that as additional units of a variable are added to a fixed input, the marginal
product remains unchanged.
Consumer Equilibrium occurs when the marginal unit per dollar is equal for all goods.
Consumer Price Index (CPI) is a weighted index of consumer goods and services used as a measure of the
price level and inflation.
Consumer Sovereignty assumes that consumers are the best judge of their own well-being.
Consumer Surplus represents the monetary value to a consumer of buying a commodity over and above
the expenditure necessary to make the purchase. It is the area below the demand curve but above the
price line.
Consumption of Fixed Capital is capital used up in the production process, equivalent to depreciation.
Contractionary Fiscal Policy is a policy to increase governmental spending and/or a reduction in taxes.
Corporatisation is the conversion of government departments that have significant trading activity into
Sate Owned Enterprises (SOEs).
Cost Push Inflation occurs when production costs increase and are able to be passed onto consumers in
the form of higher prices.
Costs of Production include the resources costs, cost of finance and services and political and legal
factors.
CPIX means the Consumer Price Index excluding credit services.
 Glossary 4

Credit Creation means that registered banks can bring about a secondary expansion of the money supply
through lending their excess reserves to customers, mainly on overdraft.
Credit Multiplier is used to calculate the maximum amount of credit banks will make available as a result
of an increase in deposits.
Cross Elasticity of Demand (Es) is used to measure the relationship between goods, so as to classify them
as substitutes, complementary or unrelated goods.
Cyclical Unemployment occurs when the level of economic activity fluctuates and with it the demand for
workers. Cyclical unemployment would occur when the economy went into a period of lower economic
activity.
Deadweight Loss (DWL) represents a loss in allocative efficiency consisting of consumer and producer
surplus that is lost to the market.
Deflation means a decrease in the price level, as measured by a fall in the CPI.
Deflationary Gap; see Recessionary Gap.
Demand Conditions means that a change in these conditions will lead to a shirt of the demand curve, and
this includes changes in the price of other goods, income, tastes, and preferences.
Demand for Money is made up of transaction and assets demand.
Demand Function is a formula setting out all of the factors that influence the demand for a commodity.
Demand is the willingness and ability to pay for a commodity. The quantity of a commodity that is
demanded at a range of prices.
Demand Deposit; see transaction account balances.
Demand Pull Inflation occurs when demand for goods and services increases and equilibrium price
increase to clear the market.
Demerit Goods are goods and services that the government considers to be bad for society (e.g.
cigarettes). Production and consumption is discouraged (e.g. through taxation).
Depreciation is a decline in the value of one currency relative to another currency. Depreciation occurs
when, because of a change in exchange rates, a unit of one currency buys fewer units of another currency
than it did previously.
Derived Demand is when the demand for a factor of production (resource) is created by the demand for a
final good (e.g. labour).
Differentiated Products are goods that are made to look different and more attractive to consumers.
Diminishing Returns occurs when as more of a good is produced, the opportunity cost of producing
another unit generally increases. In order to get equal amounts of one good, society must sacrifice
increasingly larger amounts of the other good.
Direct Tax is a tax levied directly on income, paid directly by the taxpayer to the government.
Dirty Float is a type of floating exchange rate that is not completely freely floating because central banks
intervene from time to time to alter the rate from its free-market level.
Diseconomies of Scale is where the LAC curve starts to increase, resulting form the firm growing too
large; or it may result from congestion or bottlenecks in the production process.
Disinflation occurs when prices continue to rise but at a slower rate.
Division of Labour refers to a specialised job being split into a number of separate tasks, e.g. workers on
a production line have separate tasks to perform.
 Glossary 5

Duopoly is a form of oligopoly when there are two sellers in a given market. The sellers differentiate their
products by means of heavy advertising and service. There are major barriers to entry.
Economic Cost refers to payments necessary to retain factors in present employment. They are accounting
costs plus opportunity costs involved in production.
Economic Goods are goods that are scare and can be had only at a high price. Consuming an economic
good will have an opportunity cost.
Economic Growth occurs when there is an increase in the nation’s GDP (nominal value of output), real
GDP (value of output in constant dollars) or real GDP per capita (value of output in constant dollars per
head of population). The last definition is the favoured one as it shows the actual goods and services
available per person.
Economic Objectives include economic growth, full employment, stable prices, an equitable distribution
of income and a balance of payments.
Economic Problem; see scarcity.
Economic Profit is the total revenue minus total economic costs (including all the opportunity costs of
production). Profits can be normal, supernormal or subnormal, depending on the level of competition and
the time frame.
Economic Systems are the classification of economies according to how the three fundamental questions
of ‘What’, ‘How’ and ‘For whom?’ are answered.
Economics is the study of how scare resources that have alternative uses can be allocated to satisfy
people’s unlimited wants. A science concerned with those aspects of social behaviour and those
institutions that are involved in the use of scare resources to produce and distribute goods and services to
satisfy human wants.
Economies of Scale occurs when fixed costs are spread over more units of output so that average costs
fall.
Efficiency; see production, allocative efficiency.
EFTPOS stands for Electronic Funds Transfer at Point of Sale. Transfer of funds electronically rather
than by cash of cheque.
Elasticity is a term used in economics to describe the degree of responsiveness of one variable to changes
in another variable, including price elasticity of demand, cross elasticity, income elasticity and elasticity
of supply. The coefficient can indicate perfect elasticity, elasticity, unit elasticity, and inelasticity and
perfect inelasticity.
Elasticity of Supply (Es) measures the responsiveness of quantity supplied of a good to a change in its
price.
Employed refers to all persons in the working-age population who during the week surveyed worked at
least one hour, or had a job but were temporarily not at work (e.g. on leave, holiday, illness, on strike, bad
weather).
Enterprise/Entrepreneurship refers to the risk-taking factor that has the idea and then brings together all
the other factors to produce the commodity. A person who organises, operates, and assumes the risk for
business ventures. The return on enterprise is profit.
Equality describes a situation of sameness.
Equilibrium Income is where aggregate demand equals aggregate supply. It will indicate equilibrium
price level, output and employment level.
 Glossary 6

Equilibrium of the Firm refers to the profit-maximising level of output for the firm where MC = MR, or
where TR – TC is at a maximum.
Equity describes a situation of fairness.
Excess Reserves is the amount of reserves held by an institution in excess of its reserve requirement and
required clearing balance.
Exchange Rate is the price of a country’s currency in terms of another country’s currency.
Exogenous is a factor used in an economic model whose value is determined by forces outside the model.
Expansionary Fiscal Policy is a policy to decrease governmental expenditures and/or to increase taxes
which will increase the level of economic activity.
Expenditure Approach is expenditure on GDP = C +I + ∆ R + G + (X – M).
Explicit Costs are costs arising from a contract between the entrepreneur and other persons.
Exports are commodities sold overseas.
Externalities are unintended positive or negative side-effects that result from production or consumption.
Factor Incomes are paid to owners of resources (factors of production), i.e. rent is paid to land, wages is
paid to labour, interest is paid to capital and profit is paid to enterprise.
Factor Market functions exactly the same as the ‘goods’ market with the only difference being that factors
of production are demanded and supplied.
Factors of Production are inputs into the production process and costs to the business.
Fallacy of Composition is the false assumption that, ‘If something is true for a part then it must be true for
the whole’.
Financial Assets are either cash or shares (equity) or a right to receive a financial instrument which can be
converted to cash.
Financial Institution is an institution that uses its funds chiefly to purchase financial assets (loans,
securities) as opposed to tangible property. Financial institutions can be classified according to the nature
of the principle claims they issue.
Firm refers to that economic unit which decides which factors of production, and in what combination,
are to be used in the production of goods and services for sale to other firms, households, and to the
government.
Fiscal Policies refer to decisions made by government about taxation and expenditure to influence the
level of economic activity.
Fixed Costs (FC) are costs of production that remain the same regardless of the level of output.
Fixed Exchange Rate refers to when the government determines the exchange rate for a currency; an
increase in value of the currency is terms a revaluation, and a decrease a devaluation.
Floating Exchange Rate refers to the value of a currency determined by supply and demand in the foreign
exchange market. An increase in value is termed an appreciation and a decrease a depreciation.
Foreign Exchange Rate is the price of the currency in one nation in terms of the currency of another
nation.
Free Goods are goods that are abundant and, as there is no choice involved, no opportunity cost exists if
we consume them.
Free Trade means that there are no barriers to trade.
 Glossary 7

Free-Rider Behaviour occurs in the case of public goods because consumers think that if they sit back and
wait for others to pay, they will be able to enjoy the benefits for nothing. If everyone acts like this, and no
one offers a price, the public good will not be produced.
Frictional Unemployment refers to people between jobs, i.e. left one job and waiting for another to start.
Full-time Workers are those who worked 30 hours or more during the survey week, or would have
ordinarily worked 30 hours or more but were temporarily not at work (e.g. on leave, holiday, illness, on
strike, bad weather).
Function is a hypothesised relationship between the control and response variables.
Gini Coefficient is a quantitative measure of the level of income inequality as indicated by the Lorenz
curve.
Gold Standard is a monetary system in which currencies are defined in terms of a given weight of gold.
Goods are commodities that are bought and sold in markets.
Government Expenses are the government’s current, capital and transfers expenditure, as recorded in the
budget.
Government Revenue (T) is revenue that comes mainly from taxation, as recorded in the budget.
Government Spending (G) is the final consumption spending by government; a component of aggregate
demand.
Government Stock is securities issued by the government.
Gross Domestic Product (GDP) is the total value of all final goods and services produced in New Zealand
in one year.
Gross National Expenditure is the total expenditure on goods and services by residents of New Zealand in
one year.
Gross National Product is the value of final goods and services produced by NZ companies anywhere in
the world in one year.
Hidden Economy is economic activity that is excluded from GDP because it doesn’t pass through a
market.
Homogenous Product is any product whose qualitative and quantitative distinguishing features are
identical, regardless of the firm that produces it.
Horizontal Equity is the principle that those on equal incomes should pay equal amounts of tax.
Household Labour Force Survey (HLFS) measures quarterly the number of people employed and
unemployed, and the movement from one labour force to another. The sample size is 15000 households
and approximately 30000 individuals. The Department of Statistics undertakes the survey. The HLFS
‘official’ measure will include as unemployed anyone who says they are out of work, ‘actively’ seeking it
and are able to start work within four weeks. The person will only be counted as unemployed if they are
actively seeking work (i.e. evidence of applying for jobs, responding to advertisements, attending
interviews, etc.).
Human Resources; see labour.
Imperfect Competition is where conditions required for perfect competition have not been met. Types
include monopolistic competition, oligopoly, duopoly and monopoly.
Implicit Costs refers to costs including wages of the entrepreneur (valued at opportunity costs), returns to
entrepreneur’s capital, or a portion of dividends.
Imports are commodities bought from overseas.
 Glossary 8

Incidence refers to those who pay the burden of a tax, or who benefit from a subsidy.
Income Effect is the change in the quantity demanded due to the effect upon the consumer’s real income
of the change in the price of the good, while relative prices are held constant at new relative prices.
Income Elasticity of Demand (Ey) measures the responsiveness to changes in consumers’ income of the
quantity demanded. The coefficient of cross elasticity is used to classify goods; if positive, the good is a
normal good; if negative, the good is an inferior good.
Increasing (relative) Costs is the opportunity cost of transferring resources from one output to another
increasing as more resources are employed in the production of one output, resulting in the PPC which is
concave to the origin.
Increasing Costs is the necessity of giving up more of one good for each additional unit of another good
produced. (PPC is represented as a concave to the origin.)
Increasing Returns refers to the marginal product increasing as additional units of a variable are added to
fixed input.
Indirect Tax is tax levied on goods and services, and paid indirectly to government via the supplier.
Examples include sales tax and GST. The result of indirect taxes is a parallel shift upwards of the supply
curve.
Inequality is the lack of equality in the distribution of income.
Inequity is the lack of fairness in the distribution of income.
Inferior Goods are goods that consumers buy more of, such as cheap cuts of meat and generic brands of
consumer goods, as their income falls. Any good with an income elasticity of less than zero.
Inflation is an increase in the price level measured by the annual change in the CPI.
Inflationary Gap is where equilibrium income is above full employment level of income; the economy is
at over-full capacity.
Infrastructure is the network of services that support economic activity, such as roads, drainage,
communication systems.
Injections refers to money flowing into the circular flow and the increase in the level of economic
activity, I, G, X.
Inputs; see resources.
Interest Rate is the return expressed in percentages earned on financial assts, determined by the
interaction of the supply of, and demand for, funds in financial markets. For instance, the 90-day rate is
the interest yield on 90-day bank bills.
Intervention refers to government intervention taking the form of taxes, subsidies, transfer payments,
regulations, public provision, etc.
Investment is an increase in capital formation expanding the productive capacity of the economy.
‘Invisible Hand’ (free market) refers to market forces of supply and demand allocating resources
automatically to their most efficient use. It requires consumer sovereignty; perfect mobility, information
and competition; and no externalities or public goods.
Involuntary Unemployment occurs when there is a surplus of labour (QSL > QDL).
Jobless is an alternative measure of unemployment to the ‘official’ unemployed. The jobless are the
officially unemployed plus other people during the HLFS survey week who were either available for
work but not seeking work, or actively seeking work but not immediately available for work.
 Glossary 9

Labour Force Participation Rate refers to the total of the labour force as a percentage of the working-age
population.
Labour Force refers to members of the working-age population who are classified as either ‘employed’ or
‘unemployed’.
Labour Force status refers to whether a person is employed, unemployed or not in the labour force.
Labour refers to human resources used in the production process. The productive services – the skills,
efforts, abilities and intellects – of people. The payment to labour is wages.
Land is natural resources or gifts of nature such as fish, coat, native forests, oil, water and land used in the
production process. These are either renewable or non-renewable. The payment to land is rent.
Law of Demand is ‘a fall in the price of a commodity will lead to an increase in the quantity demanded
(ceteris paribus)’, i.e. ↑ P ⇒↑ QD or vice versa.
Law of Diminishing Marginal Utility is ‘as equal additions of a good are consumer, the marginal utility
falls’, i.e. ( ↑ Q ⇒↓ MU).
Law of Diminishing Returns is ‘as additional units of a variable factor are applied to fixed factors, the
resulting increase in output will, after a certain point, be successively smaller.’
Law of Supply is ‘an increase in the price will lead to an increase in the quantity supplied (ceteris
paribus)’, i.e. ↑ P ⇒↑ QS or vice versa.
Liquidity is the ability to convert a financial asset into cash to be used as a means of exchange.
Long-run Average Cost Curve is a curve that envelops a series of separate short-run average cost curve.
Long-run is a period of time sufficient to permit variation in all inputs. Hence the scale (size) of the
factory can change in the long run.
Long-term Unemployed refers to those people out of work for at least 26 weeks.
Loose Monetary Policy is a policy of the RBNZ that is designed to expand the growth of money and
credit in the economy.
Lorenz Curve shows how much of total income is earned by different proportions of households, and
relative income inequality.
Macro-economics is the study of aggregate economic activity. This branch of economics concerns
inflation, unemployment, fiscal and monetary policies, national income, the balance of payments and the
government’s budget.
Marginal Benefit (MB) is the additional benefit received by the consumer from the consumption of an
additional unit of a good or service.
Marginal Cost (MC) is the extra cost of producing the next unit of output.
Marginal Cost Pricing is the additional cost of producing the new unit of output (MC = TC2 – TC1).
Marginal Product (MP) is the change in total product resulting from a small change in the use of a
variable factor.
Marginal Product is the extra output resulting from employing one more unit of input in the production
process.
Marginal Revenue (MR) is the increase in total revenue brought about by the sale of one more unit of
output (MR = TR2 – TR1).
 Glossary 10

Marginal Tax Rate is the rate at which a taxpayer’s next dollar of income will be taxed. For example, an
individual with annual income of $20 000 has a marginal tax rate of 19.5%, whereas an individual with
annual income of $50 000 has a marginal tax rate of 33%.
Marginal Utility (MU) is the extra satisfaction gained from consuming one more unit of a good (MU =
TU2 – TU1).
Market Demand is the horizontal summation of all individual demand curves.
Market Equilibrium is the intersection of the market demand and the market supply curves. At this point,
there is neither a surplus nor shortage; CS and PS are maximised.
Market Failure if any of the conditions required for the working of the free market are not present, market
failure occurs and there is a case for government intervention.
Market Forces, Market Equilibrium are the forces of demand and supply that will automatically lead to
equilibrium.
Market is where buyers and sellers do business. A mechanism or place for the voluntary exchange of
property rights.
Market Share is a firm’s sales as a percentage of total sales in the market.
Market Supply is the horizontal summation of all individual firms’ supply curves.
Maximum Price Control is when a price is not allowed to go beyond a limit, as determined by
government. It is used to protect the consumer, e.g. rent controls (price floor).
Means Testing means the amount of support received depends on one’s income level.
Merit Goods are goods and services that the government considers as good for the public. Production and
consumption are encouraged, e.g. by means of subsidies.
Micro-economic Reform is the deregulation of markets so that allocative efficiency can be achieved.
Micro-economics that part of economics pertaining to specific units of the economic system; households,
firms, industries; the relationship among these units, and the processes regarding the decision of what to
produce, using which production method, and how to distribute the resulting income.
Mid-point Method is the method of measuring elasticity where direction of change will not influence
coefficient.
Minimum Price Control is where the market price is not allowed to fall below a certain level, or floor,
determined by the government or a cartel such as OPEC.
Minimum Wage Rate is a minimum level, determined by government, below which nominal wage are not
allowed to go.
Mixed Goods are good with externalities or side-effects that will not be produced or consumed in socially
desirable quantities.
Momentary Period is a period of sufficiently short duration to make the supply curve perfectly inelastic.
There is no chance to respond immediately to any change in market price. The quantity supplied is fixed,
and elasticity of supply is perfectly inelastic during this period.
Monetary Conditions are the relative levels of interest rates in terms of the exchange rate. ‘Tightening
monetary conditions’ refers to action taken by the Reserve Bank to raise interest rates (which also
influence the exchange rate) in order to moderate demand pressures and to reduce inflationary pressure.
Monetary Policy is the Reserve Bank’s control of the money supply (and therefore interest rates) to
influence the level of economic activity. The main objective of monetary policy is price stability.
 Glossary 11

Monetary Supply (monetary aggregates) is the amount of money (in the form of coins, bank notes, and
cheque accounts) that is in circulation in the economy. Difference measures of the money supply are the
narrow money supply (M1), near money supply (M2) and the broad money supply (M3).
Monetised Deficit refers to the financing of a budget deficit leading directly to an increase in the money
supply.
Money Supply refers to M1 (narrow money) or M3 (broader definition).
Monopolistic Competition is when there are a large number of firms, selling similar products but able to
differentiate their markets, either through location or service.
Monopoly is when there is only one producer in the market, and this firm’s demand curve is the same as
the market demand curve.
Monopsony is when there is only one buyer in a market.
National Income is the total incomes generates from the economy in a year, as measured by GDP.
National Monopoly is a firm that can supply an entire market at a lower price than if there were two or
more firms in the market, often to be found in infrastructure or networks, such as telecommunications.
Nationalisation is when the government takes over a firm in the private sector to ensure some socially
desirable outcome.
Needs and Wants refer to basic necessities that are essential to life, e.g. food, water, and shelter. Reputed
necessities are those things some people have a ‘need’ for, such as tobacco products for smokers. Wants
are those things that are additional to needs, and not essential for survival.
Negative Externality of Consumption is the undesirable side-effects of consumption imposed on others,
e.g. negative side-effects of excess consumption of alcohol.
Negative Externality of Production is the undesirable side-effects of produced imposed on others, e/g/
pollution.
Net Exports are the export receipts less import payment (X – M).
Net Social Welfare is a broader indicator of well-being than, say, GDP. It would consider economic and
social indicators such as the number of people per doctor, infant mortality rates, educational
qualifications, life expectancy, house ownership, etc.
Nominal Values are the values at current price.
Non-monetised Deficit is the primary increase in the monetary base resulting from a budget deficit is
neutralised by borrowing from the public. There is no increase in the money supply.
Non-price Competition is strategies to increase market share involving product modification and product
variation.
Non-renewable Resources are resources that are used up in the production process and will no tbe
available to other users, such as oil and natural gas.
Normal Goods refer to an increase in income bringing about an increase in the demand for normal goods.
Any good with a positive income elasticity.
Normal Profit is where total revenue equals total costs. The returns are sufficient to compensate for the
‘risk’ of operation and the investment in plant and equipment. Normal profit will be less than accounting
profit. It could even be a negative amount if the business anticipates that establishing itself in the market
may require running at a loss for a while.
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Not in the Labour Force refers to any person in the working-age population who is neither employed nor
unemployed (e.g. retired people, home-makers, students, physically or intellectually disabled, people not
actively seeking work).
Official Cash Rate (OCR) is set by the Reserve Bank and influences the interest rate structure throughout
the economy.
Oligopoly is when there are only a few large firms that control the market. There are strong barriers to
entry. The firms produce a differentiated produce, and have some control over price.
Open Market Operations (OMO) is the buying and selling of government securities in the financial
markets, through the Reserve Bank, to influence the volume of money and credit in the economy.
Operating Balance is the fiscal balance. Government revenue less government expenses (T – G).
Opportunity Cost is the best alternative foregone having been forced by scarcity to make a choice.
Optimal Purchase Rule refers to consumers maximising utility when they consume all goods until P =
MU.
Output Gap is defined and estimated by the Reserve Bank of New Zealand as: the percentage difference
between real GDP (production, seasonally adjusted) and potential output GDP.
Output is any good which a firm produces or processes for sale.
Paradox of Value is when something which is essential to life may have a low value, whereas some
luxuries that we can do without have a high value.
Parallel Importing is micro-economic reform removing the exclusive rights of an importer to a market.
Participation Rate is the labour force expressed as a percentage of the working-age population.
Part-time Workers are those who usually work fewer than 30 hours per week.
Perfect Competition is the market situation where a large number of small firms produce an identical
produce, face no barriers to entry, earn only normal profit in the long run, and where both producers and
consumers have perfect knowledge of the market. Under perfect competition, the forces of demand and
supply are free to determine the allocation of resources and the distribution of income.
Perfect Knowledge, Information is when all firms and all consumers are able to know the prices and
qualities of every good and resource available at all times.
Perfect Mobility is when resources can be moved to where the returns are best, i.e. from sunset to sunrise
industries. Includes geographic as well as occupational mobility.
Point Elasticity refers to measure price elasticity of demand between two points on a curve.
Policy Targets Agreement is an agreement between the Government and the Reserve Bank which
stipulates medium term monetary policy objectives, e.g. acceptable inflation range (1% - 3%).
Positive Externality of Consumption is the positive side-effect of consumption that benefits others, e.g.
use of public transport.
Positive Externality of Production is the positive side-effect of production that benefits others, e.g. staff
training.
Post Hoc Fallacy is the false assumption that, ‘If two things happen one after the other, then the second
one has been caused by the first’.
Potential Output is the level of real GDP that can be sustained in the long run and that is consistent with
constant inflation.
 Glossary 13

Poverty Trap or Cycle represents the situation where people on low incomes are unable to break out of
this situation and increase their income. Often they find that their entitlement to benefits diminish as they
earn extra income so there is no incentive to improve their circumstances.
Price Controls is where price is controlled by government, to either a maximum or minimum level.
Price Discrimination is when a monopolist can differentiate its market, and charge a higher fee for those
able or willing to pay more, depending on Ep.
Price Elasticity of Demand (Ep) measures the responsiveness to a change in its price of the quantity
demanded of a good.
Price Elasticity of Supply (Es) measures the percentage change in the quantity supplied as a result of a
1% change in the price of the commodity.
Price Fixing is an agreement, in violation of anti-trust regulations, to set the price of a good at the same
price across some or all firms.
Price is the fundamental market signal. Determined in the market where QD = QS.
Primary Expansion is when money supply grows as a result of government budget or changes in
financing the deficit.
Private and Social Preferences refers to private equilibrium being allocatively efficient for private goods,
but not for mixed goods. Mixed goods will not be produced or consumed in socially desirable quantities
because of externalities.
Private Goods refers to the consumption of private goods is rival or depletable, and excludable by price;
property rights are clear and there are no externalities or spillovers. Private market equilibrium is where
MB = MC.
Privatisation is where state assets such as SOEs are sold to the private sector.
Producer Surplus is the monetary value to a seller of supplying a commodity, over and above the cost
necessary to produce the goods. It is shown by the area between the price and the supply curve.
Product Differentiation refers to strategies used to make products that are similar to others seem superior
to consumers, using things such as advertising, packaging, etc.
Product Variation refers to when products are given real differences, through product modification and
vertical product variation, such as new features to attract customers.
Production Efficiency is the combination of outputs produced when all available resources and
technology are being used; whatever output is being produced at the lowest possible cost for that level of
output; and the economy is producing on its production possibility curve.
Production Possibility Curve (PPC) shows the maximum combination of two goods that can be produced
assuming all resources are used efficiently and there is a fixed level of technology.
Production refers to using resources, processing them in some way and bringing into existence goods and
services.
Productive Capacity is the amount that a country is able to produce and is shown by the PPF.
Productivity measures the output per unit of inputs.
Profit is the return to the resource enterprise and is revenue less cost.
Property Rights means that ownership of a particular resource can be determined, and the owner can
decide how and when the resource is to be used or sold.
Protectionism is trade barriers used to protect domestic producers against overseas competition.
 Glossary 14

Prudential Ratio; see reserve ratio.

Public Finance Amendment Act 2004 is the statute that now includes the commitment under the repealed
Fiscal Responsibilities Act 1994 for the NZ Government to run budget surpluses and reduce public debt
levels to less than 20% of GDP.
Public Goods refers to price signals for public goods being non-existent, because the goods are non-rival
and they are non-excludable by price, e.g. street lighting.
Public Provision is where the government provides goods and services that would not otherwise be
provided by the market.
Purchasing Power Parity Theory is a theory in terms of which the exchange rate between any two
currencies adjusts to reflect changes in the price levels within the two countries.
Quantity Theory of Money suggests that inflation can persist only if the money supply rises to
accommodate it. MV = PQ (Fisher Equation).
Quotas means a restriction on the volume of goods traded.
Real GDP is GDP adjusted for inflation. Real GDP provides the value of GDP in constant dollars, which
is used as an indicator of the volume of the nation’s output.
Real Values is where the nominal value (in current dollars) is adjusted for changes in the price level,
usually calculated by dividing nominal value by the CPI to give the constant value.
Real Wage Rate is the nominal wage rate divided by the price level, which gives the purchasing power of
wages.
Recession occurs when there is a significant decline in economic activity, over a period of time.
Recessionary Gap occurs when the equilibrium income is below the full employment level, thus the
economy is below capacity resulting in high unemployment.
Redistributive Policies refers to when the government measures to redistribute income from the rich to the
poor, such as progressive income tax and transfer payments.
Registered Bank is a bank that offers a broad range of deposit accounts, including cheque, savings, and
time deposits, and extends loans to individuals and businesses.
Registered Jobseekers are the number of unemployed people registered with Work and Income (Ministry
of Social Development) as job-seekers.
Regulation refers to government control over various types of economic activity.
Renewable Resources are resources that can regenerate. They can be sustainably exploited.
Rent is the payment to land (natural resources).
Reserve Bank Act (1989) sets out the monetary policy framework giving autonomy to the RBNZ to
achieve price stability as defined by the PTA.
Reserve Bank of New Zealand is the central bank and determines the monetary policy framework to
achieve price stability.
Reserve Ratio is the ratio of reserves to total deposits that registered banks consider as prudent to keep
available to meet claims by depositors.
Reserves are financial assets available to a bank to pay for customer withdrawals.
Resource Management refers to ensuring the equitable and sustainable allocation of resources, including
the RMA and QMS.
 Glossary 15

Resources are the inputs into the production process, including land, labour, capital and entrepreneurship.
Returns to Scale Revenue are income from sales. Total revenue (TR) = P – Q.
Saving refers to sacrificing present consumption.
Scarcity is a relative term. Scarcity results when resources are limited, and human wants are unlimited,
and is the bases of the study of Economics.
Secondary Expansion; see credit creation.
Services are generally intangible things that are frequently consumed at the same time as they are
produced such as haircuts, restaurant meals, etc.
Settlement Cash refers to reserves held by registered banks at the Reserve Bank to make it possible for
inter-bank debt to be settled.
Short Run is a period of time in which there is at least one fixed factor.
Shortage is where there is excess demand in a market. QD > QS.
Short-run Diseconomies; see diminishing returns.
Short-run Economies or Increasing Returns can be seen on the downward-sloping sections of the MC,
resulting from more efficient factor combinations and FC being spread over more units of output.
Shut-down Point is where a firm’s revenue is less than the avoidable costs and the firm is best advised to
shut down. This occurs where P = AVC.
Socially Desirable Equilibrium is the level of output, where MC = AR, or the supply and demand curve
intersect. For mixed goods there is where the MSC intersects the MSB, and where the difference between
TSB (total social benefit) and TSC (total social costs) is at a maximum.
Specialisation is where each productive firm concentrates on producing those commodities in which it has
expertise and lower costs.
Spillovers; see externalities.
State Sector refers to government involvement in the economy.
State Sector Reform refers to deregulation, corporatisation and privatisation undertaken in New Zealand
in the 1980s and 1990s.
Structural Unemployment occurs when workers lose their jobs in older industries that have been replaced
by newer processes or products. Their skills may not be transferable so they will find it difficult to get a
job.
Subnormal Profit occurs when total revenue is less than total economic costs. The level of profit is below
the level necessary to keep the firm in that type of activity.
Subsidy is a payment by government to producers in order to reduce the costs of production. A subsidy
has the opposite effect to that of an indirect tax.
Substitute Good is a good that can be used in place of another, e.g. butter and margarine.
Substitution Effect is the change in the quantity demanded due to a change in the relative price of a good,
holding real income constant. Relative price is the price of a good as it compares to the prices of other
goods.
Supernormal Profit occurs when total revenue is greater than total economic costs. The level of profit is
above the level necessary to keep the firm in that type of activity and will attract other firms into the
industry.
 Glossary 16

Supply Conditions are factors that, if changed, will lead to a shift of the supply curve, and include cost of
production, level of technology, prices of other goods, taxes and subsidies and the goals of the producer.
Supply Curve is the individual firm’s supply curve consisting of the firm’s MC curve, but only the
portion above AVC.
Supply Function is the relationship between the price per unit and the quantity supplied per unit time
assuming supply conditions remain constant.
Surplus occurs where there is excess supply in a market. QS > QD.
Tariff is a tax on imports (or exports) to protect domestic producers against overseas competition.
Tastes refer to consumer tastes and preferences influencing levels of demand for a commodity. Can be
influenced by advertising.
Taxes are compulsory payments to government consisting of direct taxes, such as income tax, and indirect
taxes, such as GST. Taxes paid to local government authorities are termed rates. They are a cost to
business.
Technical Optimum (plant capacity) is the output level (in the long run) which corresponds to the
minimum point on the long-run average cost curve. Excess capacity would be where production is less
than the minimum long-run average cost.
Temporary Employment refers to full employment for a period of less than 26 weeks.
Terms of Trade is the ratio of the export price index to the import price index.
Tight Monetary Policy is a policy to restrict the growth of money and credit in the economy.
Total Cost (TC) is represented by TC = TVC + TFC.
Total Product (TP) is the total amount produced when at least one factor is held rixed.
Total Revenue is sales or expenditure or PQ.
Total Utility (TU) is the consumer’s satisfaction from consuming a particular amount of a product.
Trade Union refers to a workers’ organisation to assist with collective wave bargaining.
Trade Weighted Index is a measure of movements in the New Zealand dollar against the currencies of its
major trading partners. These currencies are the US dollar, the Australian dollar, the Japanese yen, the
euro, and the UK pound.
Trade-off is the opportunity cost of making a political decision.
Transaction Account Balances are bank deposits that may be withdrawn at any time without prior written
notice to the bank. Also called cheque accounts.
Transaction Demand for Money is the demand for money as a means of exchange.
Transfers are payments for which no exchange is required, including benefit payments. They are
excluded from GDP.
TWI is the nominal Trade Weighted Index of the exchange rate: a geometrically-weighted index of the
New Zealand dollar bilateral exchange rates of Australia, Japan, United States, United Kingdom and
Germany.
Underlying Inflation is the measure of inflation used by RBNZ, which is the CPI less the effects of
interest rates and government charges and one-off demand shocks. Replaced in the late 1990s with CPIX.
 Glossary 17

Unemployed refers to all persons in the working-age population who during the week surveyed were
without a paid job, were available for work, and had actively sought work within the last four weeks (or
had a job to start within four weeks). A person who had only looked at advertisements in the newspaper
is not considered an active jobseeker.
Unemployment occurs when resources are not utilised, excess capacity.
Unemployment Rate is the number of unemployed people expressed as a percentage of the labour force.
Unit Elasticity is when the coefficient of elasticity = 1.
User Pays means to obtain the good or service it must be paid for.
Utility refers to the satisfaction gained from consuming a quantity of an economic good, measured in
utils.
Variable Cost refers to cost that change with output, attributable to variable input.
Variable Costs (VC) are costs of production that change with the level of output of the firm. If the firm
ceases operating, the variable costs will be zero.
Velocity is the rate at which money balances turn over in a period from expenditures on goods and
services (often measured as the ratio of GDP to the money stock). A larger velocity means that a given
quantity of money is associated with a greater dollar volume of transactions.
Vertical Equity is the principle that those on higher incomes should be paying a higher rate of tax,
because they can afford to do so.
Voluntary Unemployment occurs when workers do not volunteer for work because the wage rate is too
low.
Wages are payment to labour (human resources).
Wants; see needs and wants.
Welfare State refers to when the government provides for those who cannot provide from themselves.
Welfare Trap refers to the situation in which a person’s income may have increase, but his/her entitlement
to welfare decrease, and as a result he/she is not better off.
Withdrawals are money flowing out of the circular flow that decreases the level of economic activity, S,
T, M.
Working-age Population refers to the resident non-institutionalised civilian population of New Zealand
aged 16 years and over.
World Price is determined by the QD and QS in the world market.