Economics Study Guide

Flashcards based on the 'Economics Study Guide' lecture notes, covering key vocabulary and concepts related to GDP, economic policy, inflation, labor force, and economic growth.

US GDP Inclusion Example

The value of goods produced by a foreign-owned company within the geographical borders of the United States, regardless of where the goods are sold (e.g., Honda builds a car in Ohio, CA).

Normative Economic Statement

A statement expressing a value judgment or opinion about how the economy 'should' be, often including recommendations, like 'The Federal Reserve should lower interest rates to stimulate economic growth'.

Monetary Policy (Role)

Economic policy primarily conducted by a central bank (like the Federal Reserve) to control the money supply and interest rates to influence economic indicators.

Federal Reserve's Authority

The institution with the authority to set reserve requirements for banks and implement monetary policy.

Aggregate Price Level Change

The overall level of prices in an economy, which increases when there is any positive inflation, even if the rate of inflation decreases year-over-year (e.g., from 2.3% to 0.6%, prices still increased).

CPI Substitution Bias

An upward distortion in the Consumer Price Index (CPI) due to its fixed basket of goods, which does not account for consumers actively substituting away from more expensive items to cheaper substitutes when prices change.

Out of the Labor Force Classification

Individuals who are neither employed nor actively seeking employment, such as a person willing to work but who has not applied for jobs in several weeks.

Investment Component of GDP (Inventory)

The value of unsold goods that are produced by an economy and held in inventory by manufacturers at the end of a period, which is counted as part of the GDP's investment component.

CPI (Inflation Overstatement)

The tendency of the Consumer Price Index (CPI) to overstate the true rate of inflation because it often fails to adequately account for changes in consumer purchasing patterns or improvements in product quality.

Real Household Income Calculation

Refers to nominal household income adjusted for changes in the price level (using CPI); real income decreases if the percentage increase in nominal income is less than the percentage increase in the CPI.

Structural Economic Policy

Policies designed to change the fundamental structure or institutions of an economy, such as transforming a command economy into a free market system.

Real GDP Per Capita Growth

Generally rises when the average efficiency or productivity of workers increases.

Compounding Growth in Economics

The phenomenon where minor yearly growth rates accumulate over extended periods to create substantial long-term differences in economic variables, such as real GDP.

GDP vs. Economic Welfare (Leisure)

Gross Domestic Product (GDP) does not fully capture economic welfare because it excludes non-market activities like leisure time, meaning a higher standard of living might exist even with a lower GDP if leisure time is abundant.

Positive Economic Statement

An objective, factual statement about the economy that can be empirically tested for truth or falsity, describing 'what is' or 'what will be,' such as 'Reducing taxes will likely increase consumer spending'.

Fiscal Policy (Definition)

Government policy that involves adjusting government spending and taxation levels to influence the business cycle and overall economic conditions.