Economics vocabulary: Describing how the economy is performing online exercise

The performance of the economy is a common topic of conversation. Because how well or how badly it is performing affects all of us.

So it is important to not only be able to describe what the situation is with the economy, but also be sure that you both understand and use the economic terms and phrases correctly.

In this online exercise on economic vocabulary, you will both learn and remember common English vocabulary which is used to describe the performance of an economy (if an economy is doing well, badly etc...).

The vocabulary which you are going to learn and understand in this exercise are the following words/phrases: recession, GDP, depression, bubble, demand, supply, economic downturn, economic expansion, boom, economic recovery & stagnation.

To find out the vocabulary used to describe economic trends, do my exercise on 'Vocabulary for describing trends'.

Exercise:

In the following conversation, two friends (Juan and Peter) are talking about the situation with the economy.

From the context, try to guess what the meaning of the words/phrases in bold are. Then do the quiz at the end to check if you are right.

Juan:'So, what's your opinion about the economy at the moment?'

Peter:'More positive than I was a couple of years ago when the economy was in recession and people were losing their jobs and businesses were closing down.'

Juan:'I know that a recession is bad, but what actually does it mean?'

Peter:'A recession is when the size of an economy decreases in two consecutive quarters of the year. For example, January to March and April to June.'

Juan:'But how do they know if an economy is either decreasing or increasing in size?'

Peter:'To see how well an economy is doing, economists look at the total value of products and services that are bought in the economy of a country during a specific period of time (e.g. a quarter or a full year). This value is called GDP (Gross Domestic Product). By comparing the amounts of GDP over a period of time, they know how well the economy is doing.'

Juan:'So, what's the difference between a recession and a depression then?'

Peter:'A depression is a very bad recession. When a recession continues for two or more years, it is called a depression. Like what happened in the 1930's.'

Juan:'What caused the economic depression in the 1930's?'

Peter:'Many factors. But the main one was the stock market bubble.'

Juan:'I don't understand what a bubble means.'

Peter:'A bubble is when the value of a particular type of product increases dramatically.'

Juan:'But isn't that a good thing for the economy?'

Peter:'Not really. The price of a product or service mainly depends on two things. Firstly, on the amount of demand there is for it, how many people want to buy or use it. And secondly, on the amount of supply of it, how much there is available to be bought or used. When there is more demand than supply, the price/value of a product or service increases.

Normally, as the price of a product or service increases this encourages other companies to start selling the product or service. This increases the supply and as a consequence the price of the product falls. But with a bubble, this doesn't happen.'

Juan:'Why?'

Peter:'Normally, because there is a limited supply of the product (like land or stocks and shares in companies) or it takes a long time for new supplies to be produced (like housing or buildings). As result, the product can become very overvalued as demand continues to grow and supply doesn't.

When the product becomes too overvalued, people stop buying it.'

Juan:'So the price falls?'

Peter:'Yes. But normally with bubbles people start to panic and the price falls dramatically, causing people to lose lots of money. Often this can affect the whole economy and cause an economic downturn, where the rate of growth in GDP falls or the size of the economy decreases. If the economic downturn lasts and the size of the economy is contracting/decreasing in size, it can become a recession.'

Juan:'So what's the opposite of an economic downturn?'

Peter:'When the size of the economy is growing (GDP is increasing), the economy is in a period of economic expansion. If the level/rate of this expansion/growth is very high and lasts for a long time, it is normally called a boom (also called an economic boom). A boom is like the opposite of a recession.'

Juan:'I've heard people call economic expansion after a recession a different name, but I can't remember what.'

Peter:'After a recession has ended and the economy is growing again, it is often called a period of economic recovery.'

Juan:'So it seems that most countries have a period of boom followed by a recession, then followed by another boom?'

Peter:'Generally that happens. But sometimes countries have a very low rate of economic growth/expansion (less than 2% a year) so they never have a boom. If an economy has this, it is called stagnation.'

Juan:'But stagnation sounds like a good thing. At least the economy is growing?'

Peter:'Not really. A healthy economy should be expanding at more than 2% per year. Economic stagnation shows that something is wrong with the economy. For some reason, companies are not performing very well and not employing more people.'

Quiz:

Below is a definition/description of each of the words in bold from the above text. Now choose the word/phrase from the question's selection box which you believe answers each question. Only use one word/phrase once. Click on the "Check" button at the bottom of the quiz to check your answers.

When the answer is correct, two icons will appear below the answer. The icon contains extra information on the word/phrase. In the icon, you can listen to the pronunciation of the word/phrase.

1. The statistic that is usually used to measure how well an economy is performing, is called

GDP:
(term) This is the acronym of 'Gross Domestic Product'. This statistic measures the size of an economy at a particular point in time (normally every quarter (3 months) of a year). By comparing the GDP between different quarters, you can see how the economy is performing (i.e if the economy is growing or decreasing in size and by how much). It is normally measured in US dollars.

This statistic measures the value of all finished products (called goods) and services in an economy which are bought. It also includes the value of all finished goods and services which are exported to other countries, but subtracts those that are imported.

In Spanish: "PIB".

GDP:

2. When the size of an economy is growing, it is called a period of

Economic expansion:
(noun) It is also called 'economic growth'. This is used to say that the size of an economy (measured by GDP) is growing/increasing. Normally this term is used in front of 'a period of'. For example 'we are currently in a period of economic expansion'.

The opposite of 'economic expansion' is 'economic downturn' (where the economy is decreasing in size or the rate/level of economic growth has fallen a lot).

In Spanish: "expansión económica".

Economic expansion:

3. When an economy decreases in size for 6 months of more, it is called a

Recession:
(noun) This is a period of economic downturn which lasts for at least 6 consecutive months (two quarters).

Why 'recessions' happen varies, but the one thing they all have in common is a lack of confidence in the economy. As a result, both people and businesses invest and spend less (so prices fall). This causes business profits and income to fall, which then results in business bankruptcies and a rise in the unemployment rate. Which causes even less investment and spending. It becomes a vicious cycle.

When a 'recession' ends and an economy starts to grow in size (called 'economic expansion') again, this is called a period of 'economic recovery'.

If a recession lasts for two or more years, it is known as a 'depression'.

In Spanish: "recesión".

Recession:

4. The amount of a product or service that is available to buy, is called the

Supply:
(noun) The main two factors which affect the price of any product or service is the 'demand' for it and the 'supply' of it.

'demand' basically means how many people are wanting to buy/consume a type of product, while 'supply' means how much of it is available to be bought. If there is more 'demand' for a type of product than there is 'supply', then its price increases as people are willing to pay more to get it. If there is more 'supply' than 'demand' for a type of product, companies tend to lower the price to try to sell more.

A good example of 'demand' and 'supply' in action is with diamonds. The companies who mine diamonds restrict the 'supply' of them on the market (they don't sell all the diamonds that they have in stock). This causes the 'demand' for them to be greater than the 'supply', which increases the price/value of diamonds on the market.

Unfortunately, in the real world it's not just 'demand' and 'supply' which affect the price of a product. There are many other factors which affect it as well (e.g. branding, taxation etc...). But 'demand' and 'supply' are by far the most important.

In Spanish: "oferta".

Supply:

5. When the size of an economy starts to decrease in size, it is called a/an

Economic downturn:
(noun) This is normally used to say that the size of an economy (measured by GDP) is decreasing. If this 'economic downturn' continues for 6 months or more than it is then called a 'recession'. If it continues for 2 years or more, it is called a 'depression'.

Confusingly, people will use 'economic downturn' to describe the situation in an economy not only when it is decreasing in size, but also when the rate/level of growth has fallen a lot (e.g. down from 3% to 0.25%). But in both situations, the economy is performing badly.

When the rate of growth in an economy starts to decrease but not dramatically (e.g. it was 3.5%, but now it's 2.6%), it is not called an 'economic downturn', but an 'economic slowdown'.

The opposite of 'economic downturn' is 'economic expansion' (where the economy is increasing or growing in size).

In Spanish: "contracción económica".

Economic downturn:

6. When an economy has a long period of very low economic growth, it is called a period of

Stagnation:
(noun) It is also called 'economic stagnation' or 'economic immobilism'. This is a period when although the size of an economy is growing, the level of growth is very low (i.e. a yearly GDP rate of below 2% ). Although this isn't as bad as a 'recession' because there is still some growth, the economy isn't performing well.

Periods of 'stagnation' are normal in most economies, but if it lasts for a long time it means that there is some form of problem(s) in the economy which is stopping economic growth (e.g. government regulations, poor infrastructure, poor quality of education and training etc...).

In Spanish: "estancamiento".

Stagnation:

7. When the value of a type of product increases dramatically and it becomes very overvalued, it is called a/an

Bubble:
(noun) This is when there is a period of dramatic increase in the price/value of products in a particular sector/industry in the economy.

'bubbles' normally happen in sectors where people often buy the product not to use but as an investment (to make more money) and where there is a limited supply of the product. Throughout most of history, 'bubbles' have mainly occurred in either the stock market or in the real estate industry (the buying and selling of property or land). A recent example is the 'dot-com bubble' on the stock market in the 1990's. Where the price of stock in technology companies increased dramatically.

Because of both the limited supply and people buying the product to make money, it can lead prices to become overvalued. As others see people making a lot of money, it encourages more people to buy the product to make money themselves. This increases the demand, which increases the price further.

Unfortunately, this increase in price is unsustainable. At some point people start to lose confidence in the product as an investment and start it sell it. Once this confidence is gone, fear of losing the money they have invested starts to spread, which causes more and more people to start selling. This leads to a rapid decrease in prices as people try to minimise their losses by selling at whatever price. When this happens, it is called a 'crash'.

If the 'crash' is big enough (e.g. the Wall Street crash of 1929), it can affect the rest of the economy and cause a 'recession' or even a 'depression'.

In Spanish: "burbuja".

Bubble:

8. When the size of an economy starts to grow again after a period when it has been decreasing in size (e.g. a recession), it is called a period of

Economic recovery:
(noun) It is a period when the size of the economy has started to grow again after a period of negative growth (when the size of the economy has contracted/decreased), like after a recession or depression.

In theory, an economy will continue to be in 'economic recovery' until the size of the economy (its real GDP) is equal or greater to what it was before the recession or depression happened.

In Spanish: "recuperación económica".

Economic recovery:

9. When an economy decreases in size for 2 years of more, it is called a

Depression:
(noun) This is a period of economic downturn which lasts for at least 2 consecutive years (8 quarters). It's basically a very long lasting and severe 'recession'. Economic 'depressions' are fortunately not very common for most countries (the last global one happened in the 1930s). Like 'recessions', the reason why 'depressions' happen varies. But the one thing they all have in common is a lack of confidence in the economy.

As a result both people and businesses invest and spend less. This causes business profits and income to fall, which then results in business bankruptcies and a rise in the unemployment rate. Which causes even less investment and spending. It becomes a vicious cycle.

When a depression ends and an economy starts to grow in size (called 'economic expansion') again, this is called a period of 'economic recovery'.

In Spanish: "depresión".

Depression:

10. The amount of people or consumers who want to buy a product or service, is called the

Demand:
(noun) The main two factors which affect the price of any product or service is the 'demand' for it and the 'supply' of it.

'demand' basically means how many people are wanting to buy/consume a type of product, while 'supply' means how much of it is available to be bought. If there is more 'demand' for a type of product than there is 'supply', then its price increases as people are willing to pay more to get it. If there is more 'supply' than 'demand' for a type of product, companies tend to lower the price to try to sell more.

A good example of 'demand' and 'supply' in action is with diamonds. The companies who mine diamonds restrict the 'supply' of them on the market (they don't sell all the diamonds that they have in stock). This causes the 'demand' for them to be greater than the 'supply', which increases the price/value of diamonds on the market.

Unfortunately, in the real world it's not just 'demand' and 'supply' which affect the price of a product. There are many other factors which affect it as well (e.g. branding, taxation etc...). But 'demand' and 'supply' are by far the most important.

In Spanish: "demanda".

Demand:

11. When an economy has a long period of good economic expansion, it is called a/an

Boom:
(noun) Also called an 'economic boom'. It is a long period (maybe a year or more) of good economic growth/expansion in an economy.

During a 'boom' sales and business activity increase month after month. Prices normally rise during a 'boom' because of greater demand, while unemployment rates fall because businesses need more staff.

The opposite of a 'boom' is called a 'recession'.

In Spanish: "boom/auge".

Boom:

To find out the vocabulary used to describe economic trends, do my exercise on 'Vocabulary for describing trends'.

Click to see more general business exercises

Practice

Now that you understand the meaning of the words/phrases and when to use them, practise using them by creating your own sentences with them in English. Also click on the "" icon under each correct answer and listen how each is pronounced correctly.

Economics vocabulary: Describing how the economy is performing exercise

Exercise:

Quiz:

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