What a Recession Is, Exactly, and Other Economic Terms You Should Know

With memories of (and the fallout from) the Great Recession of 2007 to 2009 still painfully fresh for too many families, anxiety is high over recent economic fluctuations. The U.S. economy shrank again in the second quarter this year, the Bureau of Economic Analysis announced today, and many experts and everyday Americans alike see a recession looming. You may be among them—or you may be wondering what the hell “gross domestic product” and “recession” even mean, let alone how nervous you should be about them.

Don’t despair. Knowledge is power, so let’s go over some of the economic terms you should know. These terms come from the Federal Reserve Bank of St. Louis, CORE Econ, and The Economist.

Absolute advantage

A person or a country has an absolute advantage if the inputs it uses to produce a good are less than those of some other person or country. (An input, defined below, is any resource used to create goods or services, like labor, materials, or equipment.)

Adjustment gap

This refers to the lag between an outside change in labor market conditions and the movement of the economy toward equilibrium as a result. Or, how long it takes for the market to adjust to something new, like a labor shortage.

Arbitrage

This is the practice of purchasing a good at a low price in one market to sell it at a higher price in another. Essentially, traders take advantage of lower prices in one country or region, then bring the goods they got at the low price to a country or region where those goods can bring them more money. Provided the cost of trading is lower than the price gap, they’ll profit. This term is also used in stocks. For instance, shares listed on both the London Stock Exchange and New York Stock Exchange can be arbitraged.

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