The United States and all other modern industrial economies experience significant swings in economic activity. In some years, most industries are booming and unemployment is low; in other years, most industries are operating well below capacity and unemployment is high. Periods of economic prosperity are typically called expansions or booms; periods of economic decline are […]| Econlib
The term “supply-side economics” is used in two different but related ways. Some use the term to refer to the fact that production (supply) underlies consumption and living standards. In the long run, our income levels reflect our ability to produce goods and services that people value. Higher income levels and living standards cannot be […]| Econlib
The marginal tax rate is the rate on the last dollar of income earned. This is very different from the average tax rate, which is the total tax paid as a percentage of total income earned. In 2003, for example, the United States imposed a 35 percent tax on every dollar of taxable income above […]| Econlib
Corporations are easier to create than to understand. Because corporations arose as an alternative to partnerships, they can best be understood by comparing these competing organizational structures. The presumption of partnership is that the investors will directly manage their own money rather than entrusting that task to others. Partners are “mutual agents,” meaning that each […]| Econlib
Paul Volcker, while chairman of the Board of Governors of the federal reserve system (1979–1987), was often called the second most powerful person in the United States. Volcker and company triggered the “double-dip” recessions of 1980 and 1981–1982, vanquishing the double-digit inflation of 1979–1980 and bringing the unemployment rate into double digits for the first […]| Econlib
Economists use the term “inflation” to denote an ongoing rise in the general level of prices quoted in units of money. The magnitude of inflation—the inflation rate—is usually reported as the annualized percentage growth of some broad index of money prices. With U.S. dollar prices rising, a one-dollar bill buys less each year. Inflation thus […]| Econlib
Bond markets are important components of capital markets. Bonds are fixed-income financial assets—essentially IOUs that promise the holder a specified set of payments. The value of a bond, like the value of any other asset, is the present value of the income stream one expects to receive from holding the bond. This has several implications: […]| Econlib
Few economic indicators are of more concern to Americans than unemployment statistics. Reports that unemployment rates are dropping make us happy; reports to the contrary make us anxious. But just what do unemployment figures tell us? Are they reliable measures? What influences joblessness? How Is Unemployment Defined and Measured? Each month, the federal government’s Bureau […]| Econlib
In recent years, taxation has been one of the most prominent and controversial topics in economic policy. Taxation has been a principal issue in every presidential election since 1980—with a large tax cut as a winning issue in 1980, a pledge of “Read my lips: no new taxes” in the 1988 campaign, and a statement […]| Econlib
Compound Rates of Growth In the modern version of an old legend, an investment banker asks to be paid by placing one penny on the first square of a chessboard, two pennies on the second square, four on the third, etc. If the banker had asked that only the white squares be used, the initial […]| Econlib
In a capitalistic society, profits—and losses—hold center stage. Those who own firms (the capitalists) choose managers who organize production efforts so as to maximize their income (profits). Their search for profits is guided by the famous “invisible hand” of capitalism. When profits are above the normal level, they attract additional investment, either by new firms […]| Econlib
The rate of interest measures the percentage reward a lender receives for deferring the consumption of resources until a future date. Correspondingly, it measures the price a borrower pays to have resources now. Suppose I have $100 today that I am willing to lend for one year at an annual interest rate of 5 percent. […]| Econlib
Saving means different things to different people. To some, it means putting money in the bank. To others, it means buying stocks or contributing to a pension plan. But to economists, saving means only one thing—consuming less out of a given amount of resources in the present in order to consume more in the future. […]| Econlib
Investment is one of the most important variables in economics. On its back, humans have ridden from caves to skyscrapers. Its surges and collapses are still a primary cause of recessions. Indeed, as can be seen in Figure 1, investment has dropped sharply during almost every postwar U.S. recession. As the graph suggests, one cannot […]| Econlib
Insurance plays a central role in the functioning of modern economies. Life insurance offers protection against the economic impact of an untimely death; health insurance covers the sometimes extraordinary costs of medical care; and bank deposits are insured by the federal government (see financial regulation). In each case, the insured pays a small premium in […]| Econlib
The most basic laws in economics are the law of supply and the law of demand. Indeed, almost every economic event or phenomenon is the product of the interaction of these two laws. The law of supply states that the quantity of a good supplied (i.e., the amount owners or producers offer for sale) rises […]| Econlib
