Test #2 Key Terms (Chapters 6-9)

business cycle

the economy's relatively short-term movement in and out of recession

Depreciation

the process by which capital ages over time and therefore loses its value

Depression

an especially lengthy and deep decline in output

double counting

a potential mistake to avoid in measuring GDP, in which output is counted more than once as it travels through the stages of production

durable good

long-lasting good like a car or a refrigerator

exchange rate

the price of one currency in terms of another currency

final good and service

output that is used directly for consumption, investment, government, and trade purposes

GDP per capita

GDP divided by the population

gross domestic product (GDP)

the value of the output of all final goods and services produced within a country in a year

gross national product (GNP)

includes what is produced domestically and what is produced by domestic labor and business abroad in a year

intermediate good

output provided to other businesses at a middle stage of production

Inventory

good that has been produced, but not yet been sold

national income

includes all income earned

net national product (NNP)

Gross National Product - depreciation

nominal value

the economic statistic actually announced at that time, not adjusted for inflation.

nondurable good

short-lived good like food and clothing

peak

the highest point of output in the business cycle

real value

an economic statistic after it has been adjusted for inflation

Recession

a significant decline in national output

Service

product which is intangible

standard of living

all elements that affect people’s happiness, whether people buy or sell these elements in the market or not

Structure

building used as residence, factory, office building, retail store, or for other purposes

trade balance

gap between exports and imports

trade deficit

when a nation's imports value is higher than its exports value

trade surplus

exists when a nation's exports value is higher than its imports value

trough

the lowest point of output in a recession in the business cycle

aggregate production function

the process whereby an economy as a whole turns economic inputs such as human capital, physical capital, and technology into output measured as GDP per capita

capital deepening

an increase by society in the average level of physical and/or human capital per person

compound growth rate

the rate of growth when multiplied by a base that includes past GDP growth

contractual rights

the rights of individuals to enter into agreements with others regarding the use of their property providing recourse through the legal system in the event of noncompliance

Convergence

pattern in which economies with low per capita incomes grow faster than economies with high per capita incomes

human capital

the accumulated skills and education of workers

Industrial Revolution

the widespread use of power-driven machinery and the economic and social changes that occurred in the first half of the 1800s

Infrastructure

a component of physical capital such as roads and rail systems

Innovation

putting advances in knowledge to use in a new product or service

Invention

advances in knowledge

labor productivity

the value of what is produced per worker, or per hour worked

modern economic growth

the period of rapid economic growth from the year 1870 onward

physical capital

the plant and equipment that firms use in production; this includes infrastructure

production function

the process whereby a firm turns economic inputs like labor, machinery, and raw materials into outputs like goods and services that consumers use

rule of law

the process of enacting laws that protect individual and entity rights to use their property as they see fit. Laws must be clear, public, fair, and enforced, and applicable to all members of society

special economic zone (SEZ)

area of a country, usually with access to a port where, among other benefits, the government does not tax trade

technological change

a combination of invention—advances in knowledge—and innovation

Technology

all the ways in which existing inputs produce more or higher quality, as well as different and altogether new products

adverse selection of wage cuts argument

if employers reduce wages for all workers, the best will leave

cyclical unemployment

unemployment in relation to the business cycle

discouraged workers

those who have stopped looking for employment due to the lack of suitable positions available

efficiency wage theory

the theory that the productivity of workers, either individually or as a group, will increase if the employer pays them more

frictional unemployment

unemployment that occurs as workers move between jobs

implicit contract

an unwritten agreement in the labor market that the employer will try to keep wages from falling when the economy is weak or the business is having trouble, and the employee will not expect huge salary increases when the economy or the business is strong

insider-outsider model

those already working for the firm are “insiders” who know the procedures; the other workers are “outsiders” who are recent or prospective hires

labor force participation rate

the percentage of adults in an economy who are either employed or who are unemployed and looking for a job

natural rate of unemployment

the unemployment rate that would exist in a growing and healthy economy from the combination of economic, social, and political factors that exist at a given time

out of the labor force

those who are not working and not looking for work—whether they want employment or not

relative wage coordination argument

across-the-board wage cuts are hard for an economy to implement, and workers fight against them

structural unemployment

unemployment that occurs because individuals lack skills valued by employers

underemployed

individuals who are employed in a job that is below their skills

unemployment rate

the percentage of adults who are in the labor force and seeking jobs, but who do not have jobs

adjustable-rate mortgage (ARM)

a loan a borrower uses to purchase a home in which the interest rate varies with market interest rates

base year

arbitrary year whose value as an index number economists define as 100

basket of goods and services

a hypothetical group of different items, with specified quantities of each one meant to represent a “typical” set of consumer purchases, used as a basis for calculating how the price level changes over time

Consumer Price Index (CPI)

a measure of inflation that U.S. government statisticians calculate based on the price level from a fixed basket of goods and services that represents the average consumer's purchases

core inflation index

a measure of inflation typically calculated by taking the CPI and excluding volatile economic variables such as food and energy prices to better measure the underlying and persistent trend in long-term prices

cost-of-living adjustments (COLAs)

a contractual provision that wage increases will keep up with inflation

Deflation

when the average prices of goods and services fall

Employment Cost Index

a measure of inflation based on wages paid in the labor market

GDP deflator

a measure of inflation based on the prices of all the GDP components

Hyperinflation

an outburst of high inflation that often occurs (although not exclusively) when economies shift from a controlled economy to a market-oriented economy

index number

a unit-free number derived from the price level over a number of years, which makes computing inflation rates easier, since the index number has values around 100

Indexed

a price, wage, or interest rate is adjusted automatically for inflation

Inflation

a general and ongoing rise in price levels in an economy

International Price Index

a measure of inflation based on the prices of merchandise that is exported or imported

Producer Price Index (PPI)

a measure of inflation based on prices paid for supplies and inputs by producers of goods and services

quality/new goods bias

inflation calculated using a fixed basket of goods over time tends to overstate the true rise in cost of living, because it does not account for improvements in the quality of existing goods or the invention of new goods

substitution bias

an inflation rate calculated using a fixed basket of goods over time tends to overstate the true rise in the cost of living, because it does not take into account that the person can substitute away from goods whose prices rise considerably