Essential Economic Concepts: Definitions and Terms

Global Economic Governance and Trade

Globalization (Globalización): The world is more connected for trade, capital, and people crossing borders. Big groups like the OMC (WTO), FMI (IMF), and Banco Mundial (World Bank) help countries trade and provide loans when needed.

International Institutions

• WTO / OMC (Organización Mundial del Comercio): Controls global trade rules.
• IMF / FMI (Fondo Monetario Internacional): Lends money to countries in financial trouble.
• World Bank / BM (Banco Mundial): Provides loans for development projects.

International Trade Balances

• Trade Deficit (Déficit comercial): Occurs when a country imports more than it exports.
• Trade Surplus (Superávit comercial): Occurs when a country exports more than it imports.
• Balance of Payments (Balanza de pagos): A record of all money flowing in and out of a country.

Core Principles of Economics

The main idea in economics is Scarcity (Escasez): limited resources versus unlimited wants. Because of scarcity, we must make choices, which creates a Coste de oportunidad (Opportunity Cost) — what you give up to get something.

• Trade-off (Disyuntiva): Choosing one option means giving up another.
• Marginal Thinking (Pensar en términos marginales): Comparing the extra cost versus the extra benefit of a decision.
• Incentive (Incentivo): A reward or penalty that changes behavior.

Economic Systems

• Market Economy (Economía de mercado): Buyers and sellers decide, not the state.
• Mixed Economy (Economía mixta): A market system combined with some government intervention.
• Invisible Hand (Mano invisible): (Adam Smith) The concept that prices and self-interest can guide markets toward beneficial societal results without the State controlling everything.

Money, Central Banks, and Monetary Policy

The Money Supply (Oferta monetaria) is all money circulating in the economy.

• M1 / M2: M1 includes cash and checking accounts; M2 includes M1 plus savings.
• Fiat Money (Dinero fiduciario): Money with no intrinsic value, relying only on trust and legal decree.
• Commodity Money (Dinero mercancía): Money that has intrinsic value (e.g., gold).

Monetary Tools and Concepts

The Central Bank (Banco Central) controls money using Monetary Policy (Política monetaria).

• Interest Rate (Tipo de interés): The cost of borrowing money.
• Expansionary Policy (Política expansiva): Lowers rates or buys Bonds (Bonos) to increase the money supply and stimulate growth.
• Contractionary Policy (Política contractiva): Raises rates or sells bonds to decrease the money supply and control inflation.
• Open Market Operations (Operaciones de mercado abierto): Buying or selling bonds to control the money supply.
• Reserve Requirement (Coeficiente de reservas): The fraction of deposits banks must keep safe and cannot lend.
• Liquidity Trap (Trampa de liquidez): Occurs when interest rates are near zero, but people still do not spend, making monetary policy ineffective.

The Quantity Theory of Money

The formula MV = PY (Money × Velocity = Prices × Output) shows that if the money supply (M) increases significantly without real production (Y) increasing, prices (P) will rise, potentially causing hyperinflation.

Microeconomic Foundations

Microeconomics focuses on individual markets, defined by Demand (Demanda) (how much buyers want) and Supply (Oferta) (how much sellers offer).

Demand, Supply, and Elasticity

• Elasticity (Elasticidad): Measures how sensitive demand or supply is to price changes.
• Elastic Demand (Demanda elástica): Quantity demanded changes significantly if price changes.
• Inelastic Demand (Demanda inelástica): Quantity demanded changes little if price changes.
• Substitutes (Sustitutos): Goods that can replace each other (e.g., coffee and tea). Demand is more elastic if substitutes exist.
• Complements (Complementarios): Goods used together (e.g., printer and ink).

Market Structures and Welfare

• Consumer Surplus (Excedente del consumidor): The extra benefit buyers get because they pay less than they were willing to pay (under the demand curve).
• Producer Surplus (Excedente del productor): The extra benefit sellers get because they sell for more than the minimum they would accept (above the supply curve).
• Perfect Competition (Competencia perfecta): Many sellers, identical products, no control over price (firms are price takers, their demand curve is flat).
• Monopoly (Monopolio): One seller controls the market.
• Oligopoly (Oligopolio): A few large firms control the market and monitor each other closely.

Market Failure and Intervention

• Public Goods (Bienes públicos): Goods that are non-rival and non-excludable (e.g., streetlights).
• Externality (Externalidad): A side effect (like pollution) that affects third parties not involved in the transaction.
• Deadweight Loss (Pérdida irrecuperable de eficiencia): Lost welfare when the market is inefficient or distorted.

Government Price Controls

• Price Ceiling (Precio máximo): A legal maximum price. If set below equilibrium, it causes shortage (escasez).
• Price Floor (Precio mínimo): A legal minimum price. If set above equilibrium, it causes surplus (excedente).

Macroeconomic Indicators and Cycles

Macroeconomics measures the overall health of the economy.

Key Aggregates and Inflation

• GDP / PIB (Producto Interno Bruto): The total value of all final goods and services produced within a country's borders.
• Nominal GDP (PIB nominal): GDP measured at current prices.
• Real GDP (PIB real): GDP adjusted for inflation.
• GDP per capita (PIB per cápita): GDP divided by the population, used to compare living standards.
• CPI / IPC (Índice de Precios al Consumo): Measures the average price level of a basket of consumer goods (a key measure of inflation).
• GDP Deflator (Deflactor del PIB): An inflation measure calculated by comparing Nominal GDP and Real GDP.
• Output Gap (Brecha de producción): The difference between actual GDP and potential GDP (positive or negative).

The Business Cycle and Unemployment

The Business Cycle (Ciclo económico) describes the economy's ups and downs:

1. Expansion (Expansión): The economy grows.
2. Peak (Pico): The highest point in the cycle.
3. Recession (Recesión): The economy shrinks.
4. Trough (Valle): The lowest point in the cycle.
5. Recovery (Recuperación): Growth following a trough.

Types of Unemployment (Paro)

• Natural Unemployment (Paro natural): The minimum level of unemployment that always exists (frictional + structural).
• Frictional Unemployment (Paro friccional): Short-term unemployment as people switch jobs.
• Structural Unemployment (Paro estructural): Mismatch between workers' skills and available jobs.
• Cyclical Unemployment (Paro cíclico): Unemployment caused by economic recessions due to low demand.
• Seasonal Unemployment (Paro estacional): Unemployment related to seasonal work (e.g., tourism or farming).