Interest. The fee paid in order to use borrowed money. Essentially, this is the cost of obtaining credit. Interest is calculated as a percentage of the amount borrowed. This percentage is called the interest rate. There are many different kinds of interest, including simple interest and compound interest. Interest rates are closely tied to credit risk, which is the risk that an extended credit—that is, a loan—will not be paid. In general, at a time of high credit risk, interest rates tend to go up, since creditors want to make sure they recoup their money. However, this isn’t always the case.

Investor. Someone who puts money into a business in order to earn a return—that is, to make more money. Sometimes investors do this by loaning money to the entrepreneurs who are starting or running the business. More often, they do it by purchasing stock—an ownership stake—in the business. The basic point to keep in mind is that investors want to earn a return. The percentage of money they make in relation to their investment is called their return on investment, or “ROI.”—see “Return on Investment.”

Macroeconomics. As implied by the term “macro,” the study of economics on a large scale: regional, national, or international economic trends and issues. Macroeconomists try to figure out what drives entire economic systems, and what impact these systems have on each other.

Microeconomics. Basically the opposite of macroeconomics. Microeconomics studies economic movement on a smaller scale—for individual businesses or even on the level of individual households. Microeconomists also study the behavior of companies and regions to understand how these units are allocating their resources and responding to pressures from above and below. A microeconomist might also study the behavior of a single product or product type.

Monopoly. A single company or individual controlling an entire product or service. In the nineteenth century, monopolies were fairly common in America (Standard Oil, for example). Throughout the late nineteenth and twentieth centuries, many of them were broken up by legislation, starting with the Sherman Antitrust Act of 1890. Today, government agencies review mergers in an attempt to prevent the formation of monopolies. In recent years, several monopoly-related cases have received a great deal of attention, most famously involving Microsoft, and have also entered the conversation with major wireless carriers, the oil industry, and other mergers.

Mortgage. The security for the money you owe to a lender. When you take out a mortgage, you borrow money and give the lender an interest in a property to secure the repayment of the debt. When you’ve satisfied the terms of the mortgage (that is, when you’ve paid the debt), the interest of the lender in your property will be returned to you. If you don’t repay the debt, the lender can foreclose on the property.

Outsourcing. The increasingly common practice of contracting people outside an organization to perform work that used to be done by people within a company. Outsourcing has grown massively to include everything from call centers and customer service to information technology services. Many American companies are outsourcing overseas to countries such as India, China, and Mexico, where labor costs and other costs of doing business are lower.

Publicly Held Company. A company that’s registered with the Securities and Exchange Commission and whose stock is traded on the open market, where it can be bought and sold by the public. In a privately held company, on the other hand, stock is held by a relatively small number of shareholders, who don’t trade it openly. Often these are family or friends of the owner. Eventually, the company may hold an initial public offering (IPO) and issue stock shares on the open market. After the company registers with the SEC, it becomes a public company.

Productivity. A measure of efficiency. It’s often expressed as the ratio of units to labor hours (a company produces two thousand pairs of shoes per hour, for example). Productivity is one element that’s factored into studies of economic growth. In general, industries try to increase productivity through technological innovation and other methods.

Profit Margin. A company’s net income divided by sales. It’s a basic measure of profitability, one that companies look at closely each year. Companies also look at metrics like revenue, but they aren’t considered as significant as profit margin. After all, a company can increase its revenue by selling more products, but if the production costs increase (for example, because of a rise in the price of raw materials or labor), the company isn’t really making any more money.

Return on Investment. A measure of how much money an investor gets back relative to the amount invested. It’s sometimes called the rate of return or the rate of profit. Many people make decisions about investment or other financial activities based on their calculation of ROI.

Venture Capital. Money that’s put into new businesses by outside investors. Venture capitalists tend to look for high-potential startup companies that can grow quickly and provide a strong return on investment. Family and friends who lend money for startups are sometimes referred to as angel capital. In some cases, venture capitalists anticipate that the company will grow to a certain stage and then be sold for a profit, and they’ll reap a rich reward. Alternately, the company may be successful in its initial public offering and see its stock rise dramatically in value. Many large companies such as Google and more recently Facebook started out this way.

CHAPTER 2

Economy and Economic Cycles

We start with the economy. Not a big surprise in a book titled 101 Things Everyone Should Know about Economics. By way of definition, the economy is a system to allocate scarce resources to provide the things we need. That system includes the production, distribution, consumption, and exchange of goods and services. It is about what we do as a society to support ourselves, and about how we exchange what we do to take advantage of our skills, land, labor, and capital.

Of course, that definition is a bit oversimplified. The economy is really a fabulously complicated mechanism that hums along at high speed—the speed of light with today’s technology—to facilitate production and consumption. The economy itself is fairly abstract, but touches us as individuals with things like income, consumption, savings, and investments, or more concretely, with money, food, cars, fuel, and savings for college.

One could only wish ours was a “steady state” economy—that it would always provide exactly what we need when we needed it. Unfortunately, it isn’t so simple. The economy is directly influenced by a huge, disconnected aggregation of individual decisions. There is no “central” planning for the economy (yes, it’s been tried, but doesn’t work for a variety of reasons), although governments, central banks, and other economic authorities can influence its direction. Because the economy functions on millions of small decisions, the economy is subject to error—overproduction and overconsumption, for example. Take these errors, add in a few unforeseen events, and the result is that economies go through cycles of strength and weakness.

The first fifteen entries describe the economy, economic cycles, economic results, and some of the measures economists use to measure economic activity.

1. INCOME

Income is the money we receive in order to buy what we need when we need it. Economists look at income in several different ways—including where it comes from, how much is earned, and how much of what is earned can really be spent. Income includes the following money flows: wages to labor, profit to businesses and enterprise, interest to capital, and rent to land.