HSC Economics Glossary: Every Key Term from A to Z

Imprecise terminology is one of the four criticisms NESA's examiners repeat almost every year. On the 2025 paper they reported responses confusing the cash rate mechanism with exchange rate effects, and students blurring the unemployment rate with the participation rate.

This glossary covers the terms the Year 12 course uses, defined the way a marker wants to read them. Where two terms are easy to confuse, the entry says how they differ. Where we have full notes on a topic, the entry links to them.

A good definition earns marks on its own. In Section II, "define" and "outline" parts are often worth 2 marks, and the first sentence of a strong extended response usually defines the key term in the question.

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A

Term	Meaning
Aggregate demand	Total spending on final goods and services in an economy: consumption + investment + government spending + exports − imports.
Aggregate supply	The total output an economy's firms are willing and able to produce at each price level. Raised in the long run by productivity growth and microeconomic reform.
Appreciation	A rise in the value of a currency against another currency, under a floating exchange rate. Makes exports dearer and imports cheaper in that currency.
APEC	Asia-Pacific Economic Cooperation, a forum of 21 Pacific Rim economies that promotes trade and investment liberalisation through voluntary, non-binding commitments.
ASEAN	The Association of Southeast Asian Nations, a regional grouping of Southeast Asian economies that has reduced trade barriers among its members.
Automatic stabilisers	Parts of the Budget that change with the business cycle without any new decision, such as tax revenue and unemployment benefits. They reduce the size of economic fluctuations.

B

Term	Meaning
Balance of payments	The record of all transactions between Australian residents and the rest of the world over a period. Made up of the current account and the capital and financial account. Full notes.
Balance on goods and services	Exports minus imports of goods and services. The trade balance.
Bilateral trade agreement	A trade agreement between two countries, such as the Australia-United States Free Trade Agreement or the Australia-India ECTA.
Budget outcome	Government receipts minus outlays for a financial year. Negative means a deficit.
Business cycle	The fluctuation of economic activity around its long-run trend, through periods of expansion, peak, contraction and trough.

C

Term	Meaning
Capital and financial account	The part of the balance of payments recording capital transfers and flows of foreign investment (direct, portfolio and other). In Australia it is usually in surplus, financing the current account deficit.
Cash rate	The interest rate on unsecured overnight loans between financial institutions. The Reserve Bank sets a target for it as the instrument of monetary policy.
Comparative advantage	The ability to produce a good at a lower opportunity cost than another country. The basis of the gains from trade.
Consumer Price Index (CPI)	An index of the prices of a fixed basket of goods and services bought by households. Since November 2025 the monthly CPI is Australia's headline inflation measure.
Contractionary policy	Policy that reduces aggregate demand, such as raising the cash rate or cutting the Budget deficit. Also called tightening.
Cost-push inflation	Inflation caused by rising costs of production, such as wages, oil or imported inputs, passed on in higher prices. Compare demand-pull inflation.
Crowding out	When government borrowing raises interest rates and reduces private investment.
Current account	The part of the balance of payments recording trade in goods and services, primary income and secondary income. Australia's has usually been in deficit.
Cyclical unemployment	Unemployment caused by a lack of aggregate demand during a downturn. Falls as the economy recovers.

D

Term	Meaning
Deadweight loss	The loss of total economic welfare when a market produces a quantity other than the efficient one, for example after a tariff.
Demand-pull inflation	Inflation caused by aggregate demand growing faster than the economy's capacity to produce.
Depreciation	A fall in the value of a currency against another currency. Makes exports cheaper and imports dearer.
Deflation	A sustained fall in the general price level. Not the same as disinflation.
Dirty float	A floating exchange rate where the central bank occasionally intervenes in the foreign exchange market to influence the currency.
Discretionary fiscal policy	Deliberate changes to government spending or taxation, as opposed to automatic stabilisers.
Disinflation	A fall in the rate of inflation. Prices are still rising, just more slowly.
Distribution of income	How income is shared among individuals or households. Measured using the Lorenz curve and Gini coefficient. Full notes.

E

Term	Meaning
Ecologically sustainable development	Development that meets present needs without reducing the ability of future generations to meet theirs, by using resources at a rate the environment can sustain.
Economic development	A broad improvement in living standards and quality of life, including health, education and freedom, not just income. Measured by the HDI.
Economic growth	An increase in the volume of goods and services produced over time, measured by the change in real GDP.
Enterprise bargaining	Wage negotiation between employers and employees at the level of a single workplace or firm.
Exchange rate	The price of one currency in terms of another. Australia's has floated since 1983. Full notes.
Exchange Settlement balances	Accounts that banks hold at the Reserve Bank to settle payments with each other. The cash rate is the rate at which they lend these balances overnight.
Expansionary policy	Policy that increases aggregate demand, such as cutting the cash rate or increasing the Budget deficit. Also called easing or stimulus.
External stability	A sustainable current account deficit and foreign liabilities, low exchange rate volatility, and the ability to meet foreign debt obligations. Full notes.
Externality	A cost or benefit of production or consumption that falls on a third party not involved in the transaction.

F

Term	Meaning
Fair Work Commission	The national body that sets award wages and the minimum wage, and oversees enterprise bargaining.
Fiscal policy	The government's use of the Budget, meaning changes in spending and revenue, to influence economic activity and achieve its economic objectives. Full notes.
Foreign debt	Borrowings owed to non-residents, which must be repaid with interest. Net foreign debt deducts Australian lending to the rest of the world.
Foreign direct investment	Investment that gives a foreign investor a lasting interest in, and significant control over, an enterprise. Conventionally 10% or more of ownership.
Foreign liabilities	Everything Australians owe to non-residents: foreign debt plus foreign equity. Net foreign liabilities deduct Australia's foreign assets.
Free trade	Trade between countries without government restrictions such as tariffs, quotas or subsidies.
Frictional unemployment	Short-term unemployment while people move between jobs. Exists even at full employment.
Full employment	Unemployment at the NAIRU, where only frictional, structural and seasonal unemployment remain.

G

Term	Meaning
G20	A forum of the world's 19 largest economies plus the European Union and the African Union. Coordinates international economic policy.
GDP (gross domestic product)	The total market value of final goods and services produced within an economy over a period.
Gini coefficient	A measure of inequality from 0 (perfect equality) to 1 (one household has all the income), calculated from the Lorenz curve.
Globalisation	The increasing integration of the world's economies through flows of trade, investment, finance, technology and labour.
GNI (gross national income)	GDP plus net income received from overseas. A better measure of the income available to residents.
Gross World Product	The total value of goods and services produced by all the world's economies in a year.

H

Term	Meaning
Hidden unemployment	People who want work but are not counted as unemployed, such as discouraged workers who have stopped actively looking.
Household saving ratio	The share of household disposable income that is saved rather than spent.
Human Development Index (HDI)	A UN index combining life expectancy, education and income per person, used to compare development between countries.

I

Term	Meaning
IMF	The International Monetary Fund. Monitors the world economy, lends to countries with balance of payments problems, usually with policy conditions attached.
Import quota	A physical limit on the quantity of a good that can be imported.
Inflation	A sustained increase in the general price level. Full notes.
Inflation expectations	What households and firms expect inflation to be. Central banks try to anchor them because they feed into wage and price setting.
Interest rate differential	The gap between interest rates in Australia and overseas. A wider differential attracts capital inflow and tends to raise the AUD.
International business cycle	The pattern of growth and contraction in the world economy, which is transmitted between countries through trade and financial links.
International competitiveness	The ability of a country's firms to sell goods and services abroad at competitive prices. Affected by the exchange rate, inflation and productivity.

J

Term	Meaning
J-curve	The pattern where a depreciation first worsens the trade balance, because import and export volumes take time to respond, before improving it.

L

Term	Meaning
Labour force	Everyone aged 15 and over who is either employed or unemployed and actively looking for work.
Labour market policies	Policies that affect wage setting, skills and workplace relations, aimed at full employment, productivity and equity. Full notes.
Lorenz curve	A graph of the cumulative share of income against the cumulative share of households. The further it sags below the line of equality, the more unequal the distribution.

M

Term	Meaning
Macroeconomic policy	Policy that manages aggregate demand to stabilise the business cycle: monetary and fiscal policy. Full notes.
Marginal propensity to consume (MPC)	The share of an extra dollar of income that is spent rather than saved. Determines the size of the multiplier.
Market failure	When a free market produces an inefficient outcome, for example by ignoring externalities or under-providing public goods.
Microeconomic reform	Policy aimed at improving efficiency in individual markets and industries, raising productivity and aggregate supply. Full notes.
Monetary Policy Board	The body within the Reserve Bank that sets monetary policy. It replaced the Reserve Bank Board in that role on 1 March 2025.
Monetary policy	The Reserve Bank's setting of a cash rate target to achieve its dual mandate of price stability and full employment. Full notes.
Monetary union	A group of countries sharing a single currency and monetary policy, such as the euro area. A deeper form of integration than a trading bloc.
Multilateral trade agreement	A trade agreement among many countries, such as WTO agreements.
Multiplier	The process by which an initial change in spending causes a larger change in national income. The simple multiplier is 1 ÷ (1 − MPC).

N

Term	Meaning
NAIRU	The non-accelerating inflation rate of unemployment: the lowest unemployment rate consistent with stable inflation. The RBA's estimate is around 4.6%.
Net primary income	Income earned and paid on investment and labour between Australia and the rest of the world, mainly interest and dividends. The largest deficit item in Australia's current account.
Net secondary income	Transfers that don't involve anything in return, such as foreign aid and gifts. A small part of the current account.
Nominal	Measured in current prices, not adjusted for inflation. Compare real.

O

Term	Meaning
OECD	The Organisation for Economic Co-operation and Development. Publishes comparable data, research and policy advice for its mostly advanced member economies, with no power to enforce.
Opportunity cost	The value of the next best alternative given up when making a choice.

P

Term	Meaning
Participation rate	The labour force as a percentage of the working-age population. Not the same as the unemployment rate.
Per capita	Per person. GDP per capita divides GDP by the population, so it removes the effect of population growth.
Portfolio investment	Investment in shares or bonds that doesn't give the investor control of the enterprise.
Price stability	Inflation within the RBA's target of 2 to 3% on average over time.
Productivity	Output per unit of input. Labour productivity is output per hour worked. The main source of long-run growth in living standards.
Progressive tax	A tax that takes a larger share of income as income rises, such as Australia's personal income tax.
Protection	Government measures that give domestic producers an advantage over imports, such as tariffs, quotas, subsidies and local content rules. Full notes.
Public good	A good that is non-rival and non-excludable, so markets under-provide it. National defence is the standard example.

R

Term	Meaning
Real	Adjusted for inflation. Real GDP measures volume of output. Real wages measure purchasing power.
Recession	A significant, sustained fall in economic activity. A common rule of thumb is two consecutive quarters of falling real GDP.
Regional trading bloc	A group of countries in a region that reduce trade barriers among themselves, such as ASEAN.
Regressive tax	A tax that takes a larger share of income from lower-income earners, such as the GST as a share of income.

S

Term	Meaning
Savings and investment gap	When domestic investment exceeds domestic savings, the difference is financed from overseas, adding to foreign liabilities. The structural cause of Australia's current account deficit.
Social wage	Government services that add to living standards without being paid in cash, such as Medicare and public education.
Stagflation	High inflation and high unemployment at the same time, usually after a supply shock.
Structural budget balance	The Budget outcome with the effects of the business cycle removed, showing the underlying fiscal stance.
Structural unemployment	Unemployment caused by a mismatch between workers' skills or location and the jobs available. Often follows technological change.
Subsidy	A government payment to producers, which lowers their costs. A form of protection when given to import-competing firms.

T

Term	Meaning
Tariff	A tax on imports, raising their domestic price. Case study.
Terms of trade	The ratio of export prices to import prices. A rise means each unit of exports buys more imports.
Trade-weighted index (TWI)	The value of the AUD against a basket of currencies, weighted by each country's share of Australia's trade.
Transfer payments	Government payments to individuals with nothing produced in return, such as the age pension and unemployment benefits.
Transnational corporation	A firm that produces in more than one country. A main channel of foreign direct investment and technology transfer.
Trimmed mean	A measure of underlying inflation that removes the most extreme price movements in each period. The RBA's preferred measure.

U

Term	Meaning
Underemployment	People who have a job but want and are available for more hours.
Underlying cash balance	The Budget outcome excluding Future Fund earnings. The headline measure in the Budget papers.
Underutilisation rate	The unemployment rate plus the underemployment rate.
Unemployment rate	The number of unemployed as a percentage of the labour force. Full notes.

W

Term	Meaning
Wage Price Index (WPI)	An index of the price of labour, measuring wage growth for the same jobs over time.
Wealth	The value of assets owned at a point in time. A stock, while income is a flow.
World Bank	The international institution that lends and gives grants to developing countries for development projects and poverty reduction.
WTO	The World Trade Organization. Sets the rules for international trade, runs negotiations and settles trade disputes between members.

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The pairs students mix up

Most terminology marks are lost on pairs of terms that sound similar. Learn these as pairs:

Easily confused	The difference
Unemployment rate and participation rate	Unemployed ÷ labour force, against labour force ÷ working-age population
Disinflation and deflation	Inflation falling, against prices falling
Current account and capital and financial account	Trade and income flows, against investment flows that finance them
Foreign debt and foreign liabilities	Borrowings only, against borrowings plus equity
Nominal and real	Current prices, against adjusted for inflation
Growth and development	More output, against better quality of life
Income and wealth	A flow over a period, against a stock at a point in time
Monetary union and trading bloc	Shared currency and monetary policy, against reduced trade barriers
Structural and cyclical unemployment	Skills mismatch that persists, against lack of demand that recovers

For the formulas behind several of these definitions, see our formula guide. For what each directive verb asks you to do with them, see our directive verbs guide.