Appendix D: Glossary

This glossary explains key economic terms in plain language. Terms are arranged alphabetically. Where a definition uses another glossary term, it appears in bold the first time.

Aggregate demand — Total spending in an economy by households, businesses, government, and foreign buyers. When it falls, the economy slows. When it rises too fast, inflation follows.

Aggregate supply — Total goods and services produced in an economy. When supply cannot keep up with demand, prices rise.

Appreciation — When a currency gains value against other currencies, making imports cheaper and exports more expensive.

Austerity — Cutting government spending and/or raising taxes to reduce the fiscal deficit. Can slow growth even as it improves government finances.

Balance of payments — A record of all economic transactions between a country and the rest of the world. Includes the current account (trade, remittances) and capital account (investment flows). Must always balance.

Base effect — A percentage change that looks large because the starting point was unusually small (or vice versa). A 20% growth after a 25% contraction still leaves you below where you started.

Bond — A debt instrument. When you buy a government bond, you lend money to the government in exchange for interest payments.

Capital — Anything used to produce goods: factories, machines, tools. Also: financial capital (money for investment), human capital (skills, education), social capital (trust networks).

Capital account — The part of the balance of payments recording flows of investment and loans into and out of a country.

Capital flight — Rapid outflow of money from a country, usually due to loss of investor confidence. Can trigger currency collapse.

Capitalism — An economic system where the means of production are privately owned and decisions are made through markets. Comes in many varieties, from the American to the Scandinavian model.

Cartel — Producers who agree to coordinate output and prices instead of competing. OPEC is the most famous example.

Central bank — The institution managing a country's money supply and interest rates. In India: the Reserve Bank of India (RBI). In the US: the Federal Reserve.

Communism — A system where property is collectively owned and economic decisions are made by the state. In practice, communist states were characterized by central planning and authoritarian control.

Comparative advantage — Ricardo's idea that countries benefit from trade based on relative productivity, not absolute. India and Germany both gain by specializing in what they do relatively best.

Consumer Price Index (CPI) — Tracks average price changes for a basket of consumer goods and services. India's primary inflation measure.

Consumption — Household spending on goods and services. The largest component of GDP in most countries.

Corruption — Misuse of public power for private gain. Acts as a hidden tax on economic activity.

Cost-benefit analysis — Comparing expected costs and benefits of a policy in monetary terms. Useful but limited when values like dignity or environmental health are involved.

Credit — The ability to borrow. Too little strangles the economy; too much creates bubbles.

Crowding out — When heavy government borrowing drives up interest rates, making it more expensive for private businesses to borrow.

Current account — Part of the balance of payments recording trade in goods and services plus remittances and investment income. A deficit means spending more abroad than earning.

Deflation — Sustained falling prices. Sounds good but is dangerous: people delay purchases, businesses cut production, the economy spirals down. Japan experienced this for two decades.

Demand — The quantity buyers are willing to purchase at various prices. Generally, higher price means lower demand.

Depreciation — When a currency loses value against others, making exports cheaper but imports costlier. Also: the decline in value of physical assets over time.

Depression — A severe, prolonged recession. GDP decline of 10% or more, lasting years. The Great Depression (1929-1939) is the defining example.

Devaluation — A deliberate government decision to reduce a currency's value. India devalued the rupee in 1966 and 1991.

Development — The process of improving a society's well-being. Increasingly understood to include health, education, freedom, and sustainability — not just GDP growth.

Diminishing returns — Adding more of one input while others stay constant eventually produces smaller gains. The hundredth worker on a farm adds far less than the first.

Dumping — Selling goods abroad below production cost to destroy competitors. Countries can impose anti-dumping duties in response.

Elasticity — How much demand or supply changes when price changes. Demand for medicine is inelastic (people buy it regardless). Demand for luxury goods is elastic (people cut back easily).

Embargo — A government ban on trade with a particular country.

Exchange rate — The price of one currency in terms of another. Can be fixed, floating, or managed. India uses a managed float.

Exports — Goods and services sold to other countries.

Externality — A cost or benefit affecting people not involved in a transaction. Pollution is a negative externality; education is a positive one.

Factors of production — Inputs for producing goods: land, labor, capital, and entrepreneurship.

Fiscal deficit — Government spending minus government revenue. A deficit means the government is borrowing. Usually expressed as a percentage of GDP.

Fiscal policy — Government decisions about spending and taxation. One of two main tools of economic management (the other is monetary policy).

Fixed costs — Costs that stay the same regardless of production level, like rent.

Foreign direct investment (FDI) — When a foreign company builds a factory or buys a business in another country, bringing capital, technology, and jobs.

Foreign exchange reserves — Foreign currencies and gold held by the central bank as a buffer against external shocks. India's grew from nearly nothing in 1991 to over $600 billion.

Free trade — Trade without tariffs or quotas. Benefits countries with existing advantages most, which is why developing countries have historically used protection.

GDP (Gross Domestic Product) — Total value of finished goods and services produced within a country. The most common measure of economic size. Does not measure unpaid work, inequality, or well-being.

Gini coefficient — Inequality measured from 0 (perfect equality) to 1 (one person owns everything). Scandinavia: ~0.30. South Africa: ~0.63. India: ~0.35 (consumption-based).

Globalization — Increasing integration of economies through trade, investment, technology, and migration. Benefits and costs are fiercely debated.

Gold standard — A system where currency is backed by gold. Provided stability but limited governments' ability to respond to recessions. Mostly abandoned in the 1930s; fully ended in 1971.

GNP (Gross National Product) — Like GDP, but measures output by a country's citizens regardless of location, rather than output within borders.

Human capital — Skills, knowledge, health, and education embodied in a workforce. Investment in human capital drives long-term growth.

Human Development Index (HDI) — Combines health, education, and income into a single development measure. Inspired partly by Amartya Sen's work.

Hyperinflation — Price increases exceeding 50% per month. Destroys savings and economic order. Examples: Germany 1923, Zimbabwe 2008.

Imports — Goods and services purchased from other countries.

Import substitution (ISI) — A strategy of producing domestically what was previously imported, using tariffs to protect local producers. India followed this from 1947 to 1991.

Infant industry — A young industry not yet competitive with established foreign producers. The infant industry argument holds that temporary protection lets it mature.

Inflation — Sustained rise in prices. Moderate inflation (2-4%) is normal. High inflation hurts the poor most.

Informal economy — Economic activity not registered or taxed. In India, roughly 80-90% of workers are in the informal economy.

Infrastructure — Roads, railways, ports, power grids, telecom networks. Typically government-provided because it benefits everyone.

Interest rate — The cost of borrowing money. Central banks use it as their primary tool for managing the economy.

Investment — Spending on productive capacity: factories, machines, infrastructure. In economics, "investment" does not mean buying stocks.

Keynesian economics — School emphasizing aggregate demand and government's role in fighting recessions through spending.

Labor force — Everyone who is employed or actively seeking work.

Laissez-faire — "Leave it alone." Minimal government intervention in the economy.

License Raj — India's system of industrial licensing (1950s-1991). Required government permission for business decisions. Intended to direct investment; became a mechanism for bureaucratic control.

Liquidity — How easily an asset converts to cash. Cash is the most liquid. Houses are illiquid. In crises, liquidity can vanish.

Macroeconomics — Study of the economy as a whole: total output, employment, prices, growth.

Marginal cost — The cost of producing one more unit.

Market economy — Decisions about production and pricing determined by buyers and sellers, not government planners.

Market failure — When free markets produce suboptimal outcomes: monopoly, externalities, undersupply of public goods, or information asymmetry.

Mercantilism — The sixteenth-to-eighteenth-century doctrine that wealth comes from accumulating gold through trade surpluses. Adam Smith wrote The Wealth of Nations largely against it.

Microeconomics — Study of individual markets, firms, and consumers.

Mixed economy — Combines market capitalism with government intervention. Most real economies are mixed.

Monetary policy — Central bank actions on money supply and interest rates to manage the economy.

Money supply — Total money in circulation. Measured as M1 (cash and deposits), M2 (adds savings), M3 (adds large deposits).

Monopoly — A market dominated by one seller, enabling higher prices. A monopsony is domination by one buyer.

Moral hazard — Taking excessive risks because you are insulated from consequences. Banks that expect government bailouts may gamble more recklessly.

Multiplier effect — A rupee of government spending generates more than a rupee of activity as it circulates through the economy.

Neoliberalism — Policies emphasizing free markets, deregulation, and privatization. Often used critically to describe IMF/World Bank prescriptions since the 1980s.

Nominal — Measured in current prices, without adjusting for inflation. A 10% nominal raise with 8% inflation is only a 2% real gain.

Opportunity cost — The value of what you give up when you make a choice. The opportunity cost of an MBA includes the salary you would have earned.

Privatization — Transferring state-owned enterprises to private ownership.

Productivity — Output per unit of input. Rising productivity is the fundamental source of rising living standards.

Progressive taxation — Higher incomes taxed at higher rates. Designed for fairness and to reduce inequality.

Protectionism — Shielding domestic industries from foreign competition through tariffs, quotas, or subsidies.

Public debt — Total government borrowing accumulated over time. India's is roughly 80-85% of GDP.

Public good — Something non-excludable and non-rivalrous: national defense, clean air, streetlights. Markets underprovide them.

Purchasing Power Parity (PPP) — Adjusts exchange rates for cost- of-living differences. India's GDP is ~$3.5 trillion at market rates but ~$13-14 trillion at PPP.

Quantitative easing (QE) — Central bank buying bonds to inject money when interest rates are already near zero. Used extensively after 2008.

Quota — A limit on how much of a good can be imported.

Real — Adjusted for inflation. Always prefer real numbers when comparing across time.

Recession — Two consecutive quarters of negative GDP growth. Output falls, unemployment rises.

Regressive taxation — Takes a larger share of income from the poor. Sales taxes are regressive because the poor spend more of their income.

Remittance — Money sent home by workers abroad. India receives over $100 billion per year — the world's largest.

Rent-seeking — Using power or connections to extract income without creating value.

Repo rate — Rate at which the RBI lends to banks. The key policy rate for managing the Indian economy.

Reserve currency — A currency held by central banks worldwide. The US dollar dominates, giving America enormous advantages.

Socialism — Collective ownership of the means of production. Ranges from Scandinavian welfare states to Soviet central planning.

Stagflation — Simultaneous stagnation, unemployment, and inflation. The 1970s stagflation discredited Keynesian orthodoxy.

Structural adjustment — IMF/World Bank conditions for loans: reduce spending, privatize, open markets. Applied widely in the 1980s and 1990s with controversial results.

Subsidy — Government payment to make something cheaper. India subsidizes food, fertilizer, and fuel. Essential for the poor but can become costly and politically permanent.

Supply — The quantity sellers offer at various prices.

Supply chain — The network getting a product from raw material to consumer. Modern chains are global.

Tariff — A tax on imports. Protects domestic producers but raises consumer prices.

Terms of trade — The ratio of export prices to import prices. Unfavorable terms mean a country exports cheap and imports expensive.

Trade balance — Exports minus imports. India runs a goods deficit (oil imports) and a services surplus (IT exports).

Trade war — Escalating tariffs between countries. The US-China trade war began in 2018.

Tragedy of the commons — Shared resources get overused because no individual has incentive to conserve. Ostrom showed communities can solve this collectively.

Unemployment — Being willing and able to work but unable to find a job. Official rates often understate the problem by excluding discouraged and underemployed workers.

Value added — The difference between a product's value and the cost of materials used. GDP is total value added in an economy.

Variable costs — Costs that change with production level, like raw materials.

Wholesale Price Index (WPI) — Tracks prices at the wholesale level. Tends to move before consumer prices (CPI).

World Trade Organization (WTO) — Sets international trade rules. Established 1995. Criticized for favoring wealthy nations.

Yield — The return on a bond, expressed as a percentage. Yields reflect expectations about inflation, growth, and risk.