What is the Financial Account? The financial account measures the changes in the number of foreign assets held by residents of a country. Residents include individuals/families, businesses, and the government. A country’s financial account is one of the three components of its balance of payments. The balance of payments, as the name suggests, is simply the way…
What is Market Failure? Market failure refers to the inefficient distribution of goods and services in the free market. In a typical free market, the prices of goods and services are determined by the forces of supply and demand, and any change in one of the forces results in a price change and a corresponding…
What is the Capital Account? The capital account is used to account for and measure any financial transaction within a country that isn’t exerting an active effect on that country’s savings, production, or income. The capital account – along with the current and financial accounts – make up the country’s balance of payments, which comprehensively…
What are Negative Externalities? Negative externalities occur when the product and/or consumption of a good or service exerts a negative effect on a third party independent of the transaction. An ordinary transaction involves two parties, i.e., a consumer and the producer, who are referred to as the first and second parties in the transaction. Any…
What is the Hoover Index? The Hoover Index is one of the simplest inequality metrics that are used to measure the deviation from the preferred equal distribution. The index is equal to the portion of community income that would be taken from the richer half of the population and given to the other poorer half…
What is a Comparative Advantage? In economics, a comparative advantage occurs when a country can produce a good or service at a lower opportunity cost than another country. The theory of comparative advantage is attributed to political economist David Ricardo, who wrote the book Principles of Political Economy and Taxation (1817). Ricardo used the theory…
What is a Contractionary Monetary Policy? A contractionary monetary policy is a type of monetary policy that is intended to reduce the rate of monetary expansion to fight inflation. A rise in inflation is considered the primary indicator of an overheated economy, which can be the result of extended periods of economic growth. The policy…
What is an Expansionary Monetary Policy? Expansionary monetary policy is a type of economic policy that aims to increase the rate of money supply to stimulate economic growth. A country’s central bank can enact expansionary monetary policy by lowering interest rates, reducing bank reserve requirements, and buying government securities. The goal is to make borrowing…
What is Government Spending? Government spending refers to money spent by the public sector on the acquisition of goods and provision of services such as education, healthcare, social protection, and defense. In national income accounting, when the government acquires goods and services for current use to directly satisfy the individual or collective needs and requirements of…
What is the Tragedy of the Commons? The tragedy of the commons is an economic theory that states that individuals use up resources shared by many to benefit themselves. The reality is often that because individuals tend to act in a selfish way, using resources shared by a group, everyone ends up suffering in the…
