20 Basic Terms Used in Economics
As a social science, Economics is one of the most intriguing and hotly-debated subjects in the world - a common reason why it remains one of our most popular summer courses!
Anyone looking to develop their knowledge and understanding of the subject - either for the purpose of pursuing it as an avenue of study at A-Level or university, or simply out of curiosity - should first acquaint themselves with some of the subject’s most common concepts and terminology.
However, one of the difficulties of the subject is that there are so many economic terms within the field to learn and understand. As a subject with roots traceable to the late 18th Century, it has seen rapid acceleration ever since, with vocabulary, concepts and ideas now ingrained in much of our daily linguistics.
To help learners establish some strong foundations in the field, we’ve compiled a selection of some of the most basic terms used in economics (with definitions) to help you get a head-start. Read them through below and be inspired to launch into a fascinating world of further learning and discovery.
20 Basic Terms Used in Economics
Below, you’ll find 20 introductory terms that are used frequently in the field of economics - which, if you pursue the subject at A-Level, university, or even on a summer course - you’ll be expected to understand and use too.
1. Financial markets
The term ‘financial markets,’ is a fairly broad one, referring to a marketplace where financial assets can be bought and sold. For example, the selling of equities, bonds and currencies.
Financial markets are the lifeline behind capitalist economies, allowing businesses and entrepreneurs to buy and sell their financial holdings. As such, they create securities products which provide a return for those who have excess funds (investors) and then make these available to those who need additional capital (borrowers).
A common example of a financial market which you may already be familiar with is a stock exchange, such as the New York Stock Exchange (NYSE), which trades trillions of dollars each day by buying and selling shares of publicly traded companies.
2. Gross Domestic Product (GDP)
To measure a nation’s economic performance and activity from a very broad sense, experts usually look at their gross domestic product (GDP).
Essentially, GDP refers to the total monetary value of all the completed goods and services that have been produced within a country’s borders in a set period of time.
Looking at the overall productivity of a country acts as a quick but effective measure of their economic health; it’s easily comparable against their previous reports, and, against other countries in previously similar economic positions.
Typically calculated on an annual basis, GDP can also be carried on a quarterly or even monthly basis to give a more specific picture of a given time period. For example, the UK publishes its GDP estimates on a monthly and quarterly basis to give a more accurate breakdown and short-term indication of the economy.
3. Gross National Product (GNP)
Related to GDP, gross national product (GNP) is another important economic measure used to assess a country’s growth or depreciation. It’s an estimate of the total value of all the final goods and services produced by a country’s residents.
Usually, it’s calculated by taking the sum of all personal consumption expenditures: private domestic investment, government spend, net exports, and any income earned by residents who invest overseas, away from the income earned within the country’s economy by foreign residents.
Put more simply, GNP begins with GDP, adds a country’s residents’ investment income from overseas investing, and then subtracts foreign residents’ investment income which is earned within a country.
4. Interest rates
When an individual, organisation or country borrows money, goods, or property, the lender will usually want to make financial gain from giving them the money for that period, especially because they’re offering it as support to others, rather than investing it to generate income. That is, they charge the borrower for the use of an asset. And so, they will apply an interest rate to the loan which they are supplying.
An interest rate is the proportion of a loan that is charged in addition to the money they borrow, expressed as a percentage of the outstanding loan. Typically, interest rates are calculated on an annual basis and are therefore referred to as the annual percentage rate (APR).
Interest rates apply to most lending transactions; from borrowing money to purchase homes, launching a business, or even paying for university tuition fees - most of us will take out a loan at some point in our lives and pay interest as a result.
When studying Economics, ‘inflation,’ is a term you’ll often stumble across. It refers to the decline of purchasing power of a given currency over time, leading to a rise of the cost of living.
In its simplest form, when there is inflation, there is a rise in the price we pay for goods and services.
A good way to think about it is to imagine a basket of selected goods that you usually buy - milk, bread, chocolate, etc. If you were to look back at your receipts and see that you paid less for the goods a period of time ago, and the same basket of goods now costs more, then inflation has occurred.
The rise is often expressed as a percentage, and means that a unit of currency will effectively buy you less than it did before.
Yet, inflation isn’t always a negative thing in economics. For example, those with assets like property will be happy to see inflation raise the value of their asset, so that if they were to sell, they’d receive more money than they had originally for it.
6. Economic Growth
As the name suggests, economic growth is an increase in the production of economic goods and services, compared between one period of time and another.
Economic growth can be measured by physical capital (actual goods), human capital (a larger working population than before), labour productivity (a better working age population) or technology (the tools the working population use to produce goods and services).
Traditionally, it's measured in terms of gross national product (GNP) or gross domestic product (GDP), pitching these metrics at different periods of time to see if there has been an increase in the numbers.
In Economics, the term ‘security’ refers to a financial asset or instrument that has economic value and can be purchased, sold or traded. That is, it’s a fungible asset which holds some form of monetary value.
There are three primary types of securities on the market:
- Equity: Provides ownership rights to holders
- Debt: Usually loans repaid with periodic payments
- Hybrids: A combination of debt and equity
Some of the most common examples include stocks, bonds and mutual fund shares.
8. Bear Market
In stock markets, the price of stock is generally a reflection of future prospects of cash flow and profit for companies. But when prospects begin to wane and expectations fall, prices of stock can start to decline.
In these instances, the term ‘bear market’ is used to describe this negativity or pessimistic outlook on a stock market’s performance, often when prices face a prolonged decline.
Usually, this term is used to describe when an overall market or index falls, but it can also be used to describe when individual securities prices fall at least 20% for a sustained period of time - typically at two months or more.
When a bear market tends to occur, the amount of stocks that are sold tend to increase. Investors will often turn to short-selling or put options to try and make money during a bear market as prices fall. Likewise, those with stocks invested in companies will often look to sell their stock, to avoid losing significant value from their initial investments.
9. Bull Market
In contrast to the term ‘bear market,’ a ‘bull market’ represents a much more positive outlook on a market’s current performance, indicating that stock prices have either increased or are expected to rise soon.
Generally, the term is used to refer to a stock market, but it can also be applied to anything that is traded, including bonds, currencies and real estate.
As with a bear market, the term is typically used to describe extended periods of time where securities are rising - mostly months or even years. This is because the prices of securities will often rise and fall during a trading period - sometimes multiple times a day! So, for a period of positive price increase to be recognised, it needs to be sustained over a considerable period of time.
10. Business Cycle
In Economics, a business cycle refers to a series of stages in an economy as it expands and contracts. Often referred to as a “trade cycle” or “economic cycle,” the process constantly repeats, measuring the rise and fall of Gross Domestic Product (GDP) over varying periods of time in a financial year.
Business cycles are universal across all countries that have a capitalistic economy. All such economies will face natural periods of growth and decline, though not all at the same time - so the periods in which they are measured can differ between nations.
Having an understanding of the different phases of a business cycle can help individuals, businesses and even governments make appropriate decisions around finance and policy to best support their economies.
11. Fiscal Policy
When governments decide upon their spending and taxation policies for an upcoming period, it has a significant impact on the country’s economic performance and on us as individuals. It affects our aggregate demands for goods and services, employment, inflation and long-term economic growth.
The term ‘fiscal policy’ refers to this use of government spending and taxation, and its impacts on the economy.
In economic terms, there are two main types:
- Expansionary fiscal policy: Designed to boost the economy, it is commonly used in times of high unemployment and recession. Governments tend to lower taxes and increase spending, with the aim to stimulate the economy and ensure consumers' purchasing power does not weaken.
- Contractionary fiscal policy: As the name suggests, this type of policy is designed to shrink economic growth in case of high inflation. To achieve this, governments tend to increase taxes and reduce their spending.
12. Law of Supply and Demand
The law of supply and demand is a theory used to explain the interactions between sellers and buyers for a particular product, service or resource. It defines the relationship between the price of a good and the willingness of people to buy or sell it.
The theory is based on two separate ‘laws:’ the law of demand and the law of supply. These two laws interact with each other to determine actual market prices and volume of goods on a market.
The law of demand says that when prices are high, buyers will demand less of an economic good. Equally, the law of supply says that at higher prices, sellers will supply more of an economic good.
Generally, as prices of goods and services increase, people are willing to supply more and demand less - and vice versa when the price of a good falls.
Of course, it’s never as simple as that. In fact, there are a whole multitude of independent factors that can affect the shape of market supply and demand, influencing both the prices and quantities that we observe in markets.
Macroeconomics is a particular branch of economics that examines the behaviour and performance of an economy as a whole.
Looking at a country’s wider economic picture, it focuses on the aggregate changes in an economy, such as unemployment, growth rate, GDP, inflation and more.
As a field of study, it attempts to measure how well an economy is performing, understand what forces drive it, and how its performance can be improved. Researchers will look at two main areas: long-term economic growth and performance in shorter-term business cycles.
The opposite of macroeconomics is microeconomics - a branch of economics which examines the financial decision-making process of individuals, households and businesses.
Generally, it applies to markets of goods and services, dealing with individual and economic issues, including: what buying habits people have, what factors influence their choices, and how their decisions impact the goods markets in terms of price, supply and demand. Essentially, it provides a more comprehensive understanding of market performance compared to macroeconomics.
Microeconomics can help explain a whole range of financial queries we may have, including why some goods and services are valued higher than others, and how we as individuals will respond to different prices.
Monetarism is a macroeconomic theory which argues that governments can maintain economic stability by targeting the growth rate of money supply.
In simpler terms, it states that the total amount of money in an economy is the primary determinant of economic growth. As the availability of money increases, so too does demand for goods and services. This, in turn, increases job prospects, reducing the rate of unemployment, while simultaneously stimulating economic growth.
It’s a theory that is closely associated with the economic theorist, Milton Friedman, who argued that governments should keep money supplies steady, expanding them ever so slightly each year to allow for the natural growth of the economy.
16. Keynesian Economics
Another important theory you’ll often hear among economic terms is ‘Keynesian Economics.’ Developed by the economist John Maynard Keynes, this macroeconomic theory is based on the idea that government intervention can stabilise an economy.
Developed during the 1930s in an attempt to understand the causes and recovery of the Great Depression, Keynes spearheaded a revolution which overturned the then-leading idea that free markets automatically provide full employment.
He argued that aggregate demand of an economy - measured as the sum of spending by individuals, businesses and governments - is the single most important driving force in an economy.
He added that an economy’s output of goods and services is the sum of four factors: consumption, investment, government purchases and net exports - and any increase in demand has to come from one of these. But during a recession, external forces often dampen demand, risking a reduction in spending and as such, investment in businesses making these goods.
According to Keynesian economics, to stabilise the economy, government intervention is required to moderate any growth and contractions within the market.
17. Free Market
The term ‘free market’ is an economic system which is based on supply and demand, with little to no government control. Commonly referred to as a “laissez-faire” capitalist system, it is where people can buy and sell goods freely, and most companies and properties are not owned by the government.
Overall, in a free market economy, the production of goods and services is usually determined by consumers and their patterns of spending. People are free to purchase how and what they want, with legal systems in place that protect property rights, rather than determining purchasing power.
Countries which currently operate with a free market include the United Kingdom, Australia, Canada, the USA, among many others.
18. Opportunity Cost
How many times have you purchased something in a shop, only to later return home and find the cost was lower if you were to purchase online? It can be frustrating - but most of the time, you’re still happy to have purchased the item you wanted.
In a similar vein but on a much more lucrative and higher scale, opportunity cost refers to the possible benefits an individual, investor or business misses out on when they choose to buy or sell an alternative over another.
In economics - and pretty much any financial decision we make in life - it can be easy to miss or overlook opportunity costs, usually because our energies are focused on the purchasing decision.
But, understanding the potential missed opportunities when a business or investor chooses one over another allows for better decision-making. Instead, they can take a step back, properly evaluate opportunity costs and benefits against the others, leading individuals and organisations to make more profitable decisions.
In finance, equity represents the ownership “share” of an asset or company. That is, if a company and all its assets were sold, equity represents the amount of money that would be returned to a company’s shareholders.
Also known as “shareholders’ equity,” we can think of equity as a portion of ownership in a firm or asset after subtracting any debts associated with that asset. It can be found on a company’s balance sheet.
In the world of commerce, a commodity is a basic material or product which can be purchased in large quantities for the production of other goods and services.
Commodities are incredibly important in ensuring many of our daily essentials are available to use. From crude oil used to warm our homes and fill our cars, to agricultural goods like wheat and corn to process into an array of food products for us to buy - commodities really are essential to our everyday lives.
Commodities can be bought and sold directly on the spot (cash) market, or via other derivatives, such as futures and options. However, when they are traded on an exchange, commodities must also meet a minimum set of specific standards, which are also known as a basis grade.
Broaden your understanding of Economics
Intrigued to learn more about Economics? Now you’ve got the basic vocabulary terms pinned down, it’s time to build your subject knowledge and find out more about this fascinating subject.
Join us for a 2-week Economics summer course, in Oxford or Cambridge next summer and you’ll discover how societies, governments, businesses and households impact our economies, influence the markets, and affect the success or failure of a business within a domestic economy.
We focus exclusively on contextual examples, meaning everything you learn will relate back to real-life examples that make sense to you - so you can fully understand cause and effect.
Whether you want to pursue further education and a career in Economics, or simply want to become well-versed in the subject for your personal interests - our summer course is the perfect destination for academically-curious students looking to expand their knowledge on the subject.
To find out more about our Economics summer course, please contact our admissions team to speak with an advisor. Alternatively, you can browse our website to read more about the syllabus, pricing and experience.
Share this article
Want to learn more about Economics? Become fluent with our article on basic terms used in Economics that every student should know.