Economics and business passages appear in virtually every GRE administration. These passages use specialized vocabulary that is simultaneously technical enough to confuse test-takers and common enough to appear in sophisticated non-fiction writing. Mastering this vocabulary serves double duty: it improves your reading comprehension on business passages and expands your general academic vocabulary.
Unlike pure GRE vocabulary (abstruse, perspicacious, enervate), economics vocabulary often has precise technical definitions that diverge from everyday usage. Understanding these precise meanings is what allows you to accurately answer inference and main idea questions on economics passages.
Why Economics Passages Are Hard
Economics passages on the GRE present unique challenges:
- They use technical terms that have specific meanings in economics but different (or no) meanings in general English
- They often present counterintuitive arguments (e.g., why a minimum wage increase might reduce employment)
- They include quantitative reasoning embedded in prose
- They use hedging language ("may suggest," "could imply") that must be read precisely
Core Economics Vocabulary for GRE
| Word | Definition | Example in Context |
|---|---|---|
| Aggregate | Combined total; collective | Aggregate demand fell sharply during the recession, reducing GDP by 4%. |
| Arbitrage | Exploiting price differences across markets simultaneously | Currency arbitrage opportunities disappear within seconds in modern electronic markets. |
| Asymmetric information | When one party has more information than the other | The used-car market suffers from asymmetric information — sellers know more about quality than buyers. |
| Capital | Wealth used to generate more wealth; also physical assets used in production | The firm invested heavily in human capital by subsidizing graduate education for its engineers. |
| Contraction | A period of economic decline; the opposite of expansion | The contraction of 2008-2009 was the sharpest since the Great Depression. |
| Deflation | A decrease in the general price level of goods and services | Economists feared that deflation would trigger a debt spiral by increasing the real burden of borrowing. |
| Depreciation | Decrease in value of an asset over time; also decrease in currency value | The rapid depreciation of the peso made imported goods unaffordable for many households. |
| Elasticity | Responsiveness of demand or supply to changes in price | Gasoline has relatively low price elasticity — consumers need it regardless of price fluctuations. |
| Externality | A cost or benefit affecting parties not directly involved in a transaction | Pollution is a classic negative externality — the factory profits while neighbors bear the health costs. |
| Fiscal | Relating to government revenues and expenditures | Fiscal stimulus — increased government spending and tax cuts — was deployed to counter the recession. |
Market Structure Vocabulary
GRE passages frequently discuss different market structures and the forces that shape competition. Understanding these terms is essential for answering inference questions about business contexts.
Monopoly: A market dominated by a single seller. Oligopoly: A market controlled by a small number of firms. Duopoly: A market with only two major players. Monopsony: A market with a single buyer — the mirror image of a monopoly (e.g., a company town where one employer controls the labor market).
Cartel: An agreement among competing firms to fix prices or limit production. Collusion: Secret or illegal cooperation for a deceptive purpose. Price-fixing: An agreement among competitors to charge the same price.
Market failure: When a market left to itself produces an inefficient outcome. Market failures are caused by externalities, public goods, asymmetric information, and monopoly power. This concept appears frequently in GRE passages about regulation and government intervention.
Finance-Specific Vocabulary
| Word | Definition | Example in Context |
|---|---|---|
| Amortize | To gradually write off the initial cost of an asset over a period | The company chose to amortize the software development cost over five years rather than expense it immediately. |
| Collateral | An asset pledged as security for a loan | The bank required the family home as collateral before approving the business loan. |
| Dilution | A reduction in the ownership percentage of existing shareholders when new shares are issued | The secondary offering led to significant dilution of early investors' stakes. |
| Hedging | Making an investment to reduce the risk of adverse price movements | Airlines routinely hedge against fuel price spikes by purchasing futures contracts. |
| Leverage | Using borrowed capital to increase potential return (and risk) | Excessive leverage amplified both the gains during the boom and the losses during the crash. |
| Liquidity | Ease with which an asset can be converted to cash without affecting its price | The crisis was fundamentally one of liquidity — banks held assets but could not sell them quickly enough. |
| Solvency | Ability to meet long-term financial obligations | Despite short-term cash flow problems, the company's solvency was never in question. |
| Yield | The earnings generated on an investment over a period; also the return on a bond | As bond prices rose, their yields fell — the inverse relationship at the core of fixed-income markets. |
Economic Theory Terms in GRE Passages
Beyond vocabulary, GRE economics passages often test whether you understand how economic concepts relate to each other. Key relationships to know:
Supply and demand: When supply increases and demand remains constant, price falls. When demand increases and supply remains constant, price rises. GRE passages sometimes describe this dynamic without using these exact terms — you must recognize the underlying logic.
Opportunity cost: The value of the next-best alternative foregone when making a decision. A passage might say "the true cost of attending a top graduate school includes not only tuition but the salary forgone during the years of enrollment" — this is opportunity cost without using the term.
Moral hazard: When one party takes more risks because another party bears the cost of those risks. The classic example: banks take excessive risks knowing they will be bailed out. This term appears in GRE passages about financial regulation.
Comparative advantage: The ability to produce a good at lower opportunity cost than another producer. Countries should specialize in goods where they have comparative, not absolute, advantage. This concept appears in trade-related passages.
FAQ
How technical do GRE economics passages get?
GRE economics passages are written for educated general readers, not specialists. They will use technical vocabulary (elasticity, externality, fiscal policy) but will typically provide enough context for a careful reader to understand the argument even without prior economics training. Strong vocabulary knowledge closes the gap between "careful reader" and "confident reader."
Do I need to know economics to do well on GRE verbal?
No formal economics training is needed. What you need is the vocabulary to understand the passages and the reading comprehension skills to answer questions about them. The vocabulary in this guide provides the former; regular practice with GRE-style passages develops the latter.
What is the difference between "fiscal" and "monetary" policy?
Fiscal policy involves government spending and taxation (controlled by elected governments). Monetary policy involves interest rates and money supply (controlled by central banks like the Federal Reserve). This distinction appears in GRE passages about economic intervention — knowing both terms and their relationship helps you answer inference questions accurately.
How should I study economics vocabulary differently from general GRE vocabulary?
For economics vocabulary, prioritize understanding the concepts, not just the definitions. Knowing that "elasticity" means "responsiveness of demand to price" is less useful than understanding that low-elasticity goods (necessities) maintain demand even when prices rise. Conceptual understanding makes GRE passage questions much easier to answer correctly.
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