ECON 1110 Macroeconomics: Macroeconomic Accounting and Classical Macroeconomic Theory

Comprehensive vocabulary flashcards covering National Income Accounting, the Classical Production Function, the Labour Market, the Quantity Theory of Money, and the Loanable Funds Theory.

Gross Domestic Product (GDP)

A measure of all currently produced final goods and services evaluated at market prices within an economy's geographical boundaries during a given time period.

Final Goods and Services

Goods and services purchased by the ultimate user; only these are counted in GDP to prevent double counting, since the price of the final product already includes the value of intermediate materials and labour.

Capital Goods

Plants and equipment used in the production process that are not completely used up during the period; the unused portion is classified as investment in GDP, while the worn-out portion is classified as depreciation.

Depreciation

The amount of a capital good that is worn out or used up in the production process; it represents a cost of production included in GDP through the final price of goods.

Inventory Investment

The net change in inventories of final goods awaiting sale or intermediate goods not yet used; counted in GDP because they were currently produced but have not yet entered final goods.

Gross National Product (GNP)

A measure of output produced by factors owned by the citizens, corporations, or government of a nation, regardless of where that production geographically occurs.

Expenditures Approach to GDP

A framework that calculates GDP ($Y$) by summing four expenditure components: Consumption ($C$), Investment ($I$), Government Purchases ($G$), and Net Exports ($NX$), expressed as $Y = C + I + G + NX$.

Net Exports ($NX$)

The net contribution of the foreign sector to GDP, calculated as gross exports ($X$) minus gross imports ($Z$).

Net National Product (NNP)

A measure of national output calculated by subtracting depreciation from Gross National Product ($\text{NNP} = \text{GNP} - \text{Depreciation}$), representing net production over the previous period.

National Income (NI)

The sum of all factor earnings from current production (wages, corporate profits, proprietor's income, rental income, and net interest), calculated by subtracting indirect taxes from Net National Product.

Personal Income (PI)

The income individuals actually receive in a year, calculated by subtracting corporate taxes, undistributed profits, and Social Security contributions from National Income, and adding government transfer payments and personal interest income.

Personal Disposable Income (PDI)

The income households have available to spend or save, calculated as Personal Income minus personal taxes; in simplified macroeconomic models, it is expressed as $Y - T$.

Net Taxes ($T$)

The net tax revenue collected by the government, defined as gross tax payments ($Tx$) minus government transfer payments ($Tr$): $T = Tx - Tr$.

Income Approach to Output

The method of calculating national output by showing how disposable income is divided among consumption ($C$), personal saving ($S$), and net taxes ($T$): $Y = C + S + T$.

Investment-Savings Identity

The accounting identity derived from equating the expenditures and income approaches to output: $I + G = S + T$, or $S = I + (G - T)$.

Nominal GDP

The total value of currently produced goods and services evaluated at current market prices.

Real GDP

The volume of output produced in each year calculated at the constant price level of a chosen base year.

GDP Deflator

A price index defined as the ratio of nominal GDP to real GDP multiplied by $100$, holding prices constant to base-year levels while allowing output quantities to vary.

Inflation Rate (GDP Deflator Formula)

The percentage change in the general price level between two years calculated as: $\frac{\text{GDP deflator, yr2} - \text{GDP deflator, yr1}}{\text{GDP deflator, yr1}} \times 100$.

Consumer Price Index (CPI)

A price index that measures year-to-year price changes for a fixed market basket of goods and services purchased by a typical consumer.

Producer Price Index (PPI)

A price index that measures changes in the selling prices received by domestic producers for a fixed market basket containing producer goods such as raw materials.

Classical Economics

The economic doctrine prevalent from the late eighteenth century until 1936, which asserts that free markets self-correct through flexible prices and wages, making supply the primary determinant of output.

Mercantilism

An economic doctrine opposed by classical economists that measured national wealth by the stock of precious metals (bullionism) and promoted government intervention to secure export surpluses.

Bullionism

The mercantilist line of thought asserting that a nation's wealth depends strictly on its physical accumulation of precious metals, specifically gold and silver.

Say's Law

The classical principle stating that 'supply creates its own demand,' positing that the process of production generates sufficient incomes to buy all output produced without governmental demand stimulus.

Laissez-faire (Classical Concept)

The doctrine that government should avoid interfering in market outcomes and instead act as a referee to protect market mechanisms, private property rights, and fair competition.

Classical Production Function

The relationship expressing real output ($y$) as a function of the fixed short-run capital stock ($\bar{K}$) and variable labour ($N$), demonstrating diminishing marginal returns to labour.

Marginal Product of Labour ($\text{MPN}$)

The additional output obtained from employing an extra unit of labour, representing the partial derivative and slope of the production function with respect to labour ($N$).

Labour Demand Curve ($N^D$)

A downward-sloping curve showing the quantity of labour demanded by competitive firms at each real wage, given by the condition $\frac{W}{P} = \text{MPN}$.

Labour Supply Curve ($N^S$)

An upward-sloping schedule reflecting workers' preference between consumption and leisure, indicating that a higher real wage ($\frac{W}{P}$) increases the opportunity cost of leisure and increases labour supplied.

Neutrality of Money

The classical proposition that changes in the money supply alter only nominal variables (prices and wages) proportionately, exerting no real effect on equilibrium output or employment.

Classical Aggregate Supply (AS) Curve

A vertical supply curve at the full-employment output level, showing that aggregate output is determined exclusively by real factors (technology, capital, labour) and is independent of the price level.

Quantity Theory of Money

A classical theory establishing that the money supply ($M$) is the independent variable determining the aggregate price level ($P$), meaning changes in the money stock cause proportionate changes in prices.

Equation of Exchange

The fundamental monetary identity $MV = PY$, where $M$ is the money supply, $V$ is the velocity of money, $P$ is the price level, and $Y$ is real output.

Velocity of Money ($V$)

The turnover rate of money in the economy, measuring the average number of times a currency unit changes hands to finance output transactions within a year.

Cambridge Quantity Theory

A money demand formulation developed by Marshall and Pigou, expressed as $M^D = kPY$, where individuals choose to hold a fixed proportion ($k$) of nominal income as money balances, balancing transaction needs against foregone interest.

Cambridge $k$

The fraction of nominal income ($PY$) that economic agents choose to hold as money balances; it mathematically corresponds to the reciprocal of velocity ($k = \frac{1}{V}$).

Classical Aggregate Demand (AD) Curve

A downward-sloping curve derived from $MV = PY$ plotting combinations of price level ($P$) and output ($Y$) consistent with a fixed money supply ($M$) and constant velocity ($V$).

Loanable Funds Theory

The classical model of interest rate determination where the equilibrium interest rate ($r$) equates the supply of loanable funds (savings) with the demand for loanable funds (investment plus government deficits).

Supply of Loanable Funds

The total volume of savings ($S$) made available for lending, which rises as a positive function of the interest rate due to the increased opportunity cost of current consumption.

Demand for Loanable Funds

The total borrowing demanded by business investment ($I$), which declines as interest rates rise, plus government borrowing ($G - T$), which is exogenous to the interest rate.

Crowding Out Effect

The classical result where a bond-financed increase in government spending ($G$) drives up the real interest rate, perfectly displacing an equivalent amount of private consumption and investment so that $C + I + G$ remains unchanged.