What was that word again?
cap and trade

A policy through which a limited number of permits to pollute are issued, and can be bought and sold on a market. It combines a quantity-based limit on emissions, and a price-based approach that places a cost on environmentally damaging decisions.


A situation in which a firm has more orders for its output than it can fill.

See also: low capacity utilization.

capacity utilization rate

A measure of the extent to which a firm, industry, or entire economy is producing as much as the stock of its capital goods and current knowledge would allow.

capital goods

The equipment, buildings, and other durable inputs used in producing goods and services, including where applicable any patents or other intellectual property that is used. Raw materials used in production are referred to as intermediate inputs.

capital intensity (of production)

The amount of capital goods per worker.


Making greater use of capital goods (for example machinery and equipment) as compared with labour and other inputs.

See also: labour-intensive.

capital productivity

Output per unit of capital good.

See also: labour productivity.


An economic system in which private property, markets, and firms play an important role.

capitalist revolution

Rapid improvements in technology combined with the emergence of a new economic system.


A group of firms that collude in order to increase their joint profits.

catch-up growth

The process by which many (but far from all) economies in the world close the gap between the world leader and their own economy.

categorical inequality

Inequality between particular social groups (identified, for instance, by a category such as race, nation, caste, gender or religion).

Also known as: group inequality.


A direction from cause to effect, establishing that a change in one variable produces a change in another. While a correlation is simply an assessment that two things have moved together, causation implies a mechanism accounting for the association, and is therefore a more restrictive concept.

See also: natural experiment, correlation.

central bank

The only bank that can create base money. Usually part of the government. Commercial banks have accounts at this bank, holding base money.

ceteris paribus

Economists often simplify analysis by setting aside things that are thought to be of less importance to the question of interest. The literal meaning of the expression is ‘other things equal’. In an economic model it means an analysis ‘holds other things constant’.


A means of pooling savings across households in order for a household to be able to maintain consumption when it experiences a temporary fall in income or the need for greater expenditure.

codified knowledge

Knowledge that can be written down in a form that would allow it to be understood by others and reproduced, such as the chemical formula for a drug.

See also: tacit knowledge.


An asset that a borrower pledges to a lender as a security for a loan. If the borrower is not able to make the loan payments as promised, the lender becomes the owner of the asset.

collateralized debt obligation (CDO)

A structured financial instrument (a derivative) consisting of a bond or note backed by a pool of fixed-income assets. The collapse in the value of the instruments of this type that were backed by subprime mortgage loans was a major factor in the financial crisis of 2007–2008.


Physical goods traded in a manner similar to stocks. They include metals such as gold and silver, and agricultural products such as coffee and sugar, oil and gas. Sometimes more generally used to mean anything produced for sale.

common currency area

A group of countries that use the same currency. This means there is just one monetary policy for the group.

Also known as: currency union.

common-pool resource

A rival good that one cannot prevent others from enjoying.

Also known as: common property resource.

comparative advantage

A person or country has comparative advantage in the production of a particular good, if the cost of producing an additional unit of that good relative to the cost of producing another good is lower than another person or country’s cost to produce the same two goods.

See also: absolute advantage.

competition policy

Government policy and laws to limit monopoly power and prevent cartels.

Also known as: antitrust policy.

competitive equilibrium

A market outcome in which all buyers and sellers are price-takers, and at the prevailing market price, the quantity supplied is equal to the quantity demanded.


Two goods for which an increase in the price of one leads to a decrease in the quantity demanded of the other.

See also: substitutes.

concave function

A function of two variables for which the line segment between any two points on the function lies entirely below the curve representing the function (the function is convex when the line segment lies above the function).

conspicuous consumption

The purchase of goods or services to publicly display one’s social and economic status.

constant prices

Prices corrected for increases in prices (inflation) or decreases in prices (deflation) so that a unit of currency represents the same buying power in different periods of time.

See also: purchasing power parity.

constant returns to scale

These occur when doubling all of the inputs to a production process doubles the output. The shape of a firm’s long-run average cost curve depends both on returns to scale in production and the effect of scale on the prices it pays for its inputs.

See also: increasing returns to scale, decreasing returns to scale.

constrained choice problem

This problem is about how we can do the best for ourselves, given our preferences and constraints, and when the things we value are scarce.

See also: constrained optimization problem.

constrained optimization problem

Problems in which a decision-maker chooses the values of one or more variables to achieve an objective (such as maximizing profit) subject to a constraint that determines the feasible set (such as the demand curve).

consumer durables

Consumer goods with a life expectancy of more than three years such as home furniture, cars, and fridges.

consumer price index (CPI)

A measure of the general level of prices that consumers have to pay for goods and services, including consumption taxes.

consumer surplus

The consumer’s willingness to pay for a good minus the price at which the consumer bought the good, summed across all units sold.

consumption (C)

Expenditure on consumer goods including both short-lived goods and services and long-lived goods, which are called consumer durables.

consumption function (aggregate)

An equation that shows how consumption spending in the economy as a whole depends on other variables. For example, in the multiplier model, the other variables are current disposable income and autonomous consumption.

See also: disposable income, autonomous consumption.

consumption good

A good or service that satisfies the needs of consumers over a short period.

contingent valuation

A survey-based technique used to assess the value of non-market resources.

Also known as: stated-preference model.


A legal document or understanding that specifies a set of actions that parties to the contract must undertake.


Participating in a common project that is intended to produce mutual benefits.

cooperative firm

A firm that is mostly or entirely owned by its workers, who hire and fire the managers.

coordination game

A game in which there are two Nash equilibria, of which one may be Pareto superior to the other.

Also known as: assurance game.


A statistical association in which knowing the value of one variable provides information on the likely value of the other, for example high values of one variable being commonly observed along with high values of the other variable. It can be positive or negative (it is negative when high values of one variable are observed with low values of the other). It does not mean that there is a causal relationship between the variables.

See also: causality, correlation coefficient.

correlation coefficient

A measure of how closely associated two variables are and whether they tend to take similar or dissimilar values, ranging from a value of 1 indicating that the variables take similar values (‘are positively correlated’) to –1 indicating that the variables take dissimilar variables (‘negative’ or ‘inverse’ correlation). A value of 1 or –1 indicates that knowing the value of one of the variables would allow you to perfectly predict the value of the other. A value of 0 indicates that knowing one of the variables provides no information about the value of the other.

See also: correlation, causality.

costs of entry

Startup costs that would be incurred when a seller enters a market or an industry. These would usually include the cost of acquiring and equipping new premises, research and development, the necessary patents, and the cost of finding and hiring staff.


Tending to move in the opposite direction to aggregate output and employment over the business cycle.

creative destruction

Joseph Schumpeter’s name for the process by which old technologies and the firms that do not adapt are swept away by the new, because they cannot compete in the market. In his view, the failure of unprofitable firms is creative because it releases labour and capital goods for use in new combinations.


A description of individuals who are able to borrow only on unfavourable terms.

See also: credit-excluded.


A description of individuals who are unable to borrow on any terms.

See also: credit-constrained.

credit ratings agency

A firm which collects information to calculate the credit-worthiness of individuals or companies, and sells the resulting rating for a fee to interested parties.

credit rationing

The process by which those with less wealth borrow on unfavourable terms, compared to those with more wealth.

crowding out

There are two quite distinct uses of the term. One is the observed negative effect when economic incentives displace people’s ethical or other-regarding motivations. In studies of individual behaviour, incentives may have a crowding out effect on social preferences. A second use of the term is to refer to the effect of an increase in government spending in reducing private spending, as would be expected for example in an economy working at full capacity utilization, or when a fiscal expansion is associated with a rise in the interest rate.

current account (CA)

The sum of all payments made to a country minus all payments made by the country.

See also: current account deficit, current account surplus.

current account deficit

The excess of the value of a country’s imports over the combined value of its exports plus its net earnings from assets abroad.

See also: current account, current account surplus.

current account surplus

The excess of the combined value of its exports and net earnings from assets abroad over the value of its imports.

See also: current account, current account deficit.

cyclical unemployment

The increase in unemployment above equilibrium unemployment caused by a fall in aggregate demand associated with the business cycle.

Also known as: demand-deficient unemployment. See also: equilibrium unemployment.