Macroeconomics Exam 2 Vocabulary Review: Chapters 10, 11, 13

Gross Domestic Product (GDP)

• Market value of all final goods and services produced within a country in a given period.

Circular-Flow Diagram

• A simple depiction of the macroeconomy showing spending, revenue, factor payments, and income.

Factors of Production

• Inputs like labor, land, capital, and natural resources.

Factor Payments

• Payments to the factors of production (wages, rent, profit).

Final Goods

• Goods intended for the end user

• Included in GDP.

Intermediate Goods

• Goods used as components in producing other goods

• Excluded from GDP.

Consumption (C)

• Household spending on goods and services, excluding new housing.

Investment (I)

• Spending on business capital, residential capital, and inventories.

Government Purchases (G)

• Government spending on goods and services;

• Excludes transfer payments.

Net Exports (NX)

• Exports minus imports.

Nominal GDP

• Value of goods and services at current prices.

Real GDP

• Value of goods and services at constant base‑year prices.

GDP Deflator

• Price level measure = (Nominal GDP / Real GDP) × 100.

Inflation Rate (GDP Deflator)

• Percentage change in the GDP deflator from one year to the next.

Consumer Price Index (CPI)

• Measures the overall cost of goods and services bought by a typical consumer.

Basket of Goods

• Fixed set of goods/services used to compute CPI.

Core CPI

• CPI excluding food and energy.

Producer Price Index (PPI)

• Measures cost of a basket of goods/services bought by firms.

Substitution Bias

• CPI overstates cost of living because it uses a fixed basket and misses consumer substitution.

Unmeasured Quality Change

• CPI overstates inflation because improvements in quality are hard to measure.

Indexation

• Automatic correction of dollar amounts for inflation (e.g., COLA, Social Security).

Nominal Interest Rate

• Interest rate not corrected for inflation.

Real Interest Rate

• Nominal interest rate minus inflation rate.

Financial System

• Institutions that match one person’s saving with another person’s investment.

Financial Markets

• Markets where savers directly provide funds to borrowers (bond market, stock market).

Bond

• Certificate of indebtedness specifying obligations of borrower to buyer.

Stock

• Claim to partial ownership in a firm.

Financial Intermediaries

• Institutions through which savers indirectly provide funds to borrowers (banks, mutual funds).

Mutual Fund

• Institution selling shares to the public and using proceeds to buy a portfolio of stocks/bonds.

National Saving (S)

• Income remaining after paying for consumption and government purchases.

Private Saving

• Y − T − C (household income left after taxes and consumption)

Public Saving

• T − G (tax revenue minus government spending)

Budget Surplus

• T − G > 0

Budget Deficit

• T − G < 0.

Market for Loanable Funds

• Market where savers supply funds and borrowers demand funds.

Crowding Out

• Decrease in investment caused by government borrowing.