Economics II (Macroeconomics) – Measuring a Nation’s Well-Being & the Price Level

Vocabulary flashcards summarising key macroeconomic terms, measures, schools of thought, and index concepts from the lecture notes.

Macroeconomics

The study of the economy as a whole, focusing on aggregate income, expenditure, and overall economic performance.

Circular-Flow Diagram

A visual model showing how money, goods, and resources move between households, firms, government, and the foreign sector.

Gross Domestic Product (GDP)

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

Consumption (C)

Household spending on goods and services, excluding purchases of new housing.

Investment (I)

Spending on capital equipment, inventories, and structures, including new housing.

Government Purchases (G)

Spending on goods and services by local and central governments, excluding transfer payments.

Net Exports (NX)

Exports minus imports; the foreign component of GDP.

Real GDP

GDP valued at constant base-year prices, used to measure actual output without price effects.

Nominal GDP

GDP valued at current prices; reflects both output and price changes.

GDP Deflator

Price-level index calculated as (Nominal GDP / Real GDP) × 100, indicating inflation in domestically produced goods and services.

GDP per Capita

GDP divided by population; a rough indicator of average income or standard of living.

Gross National Product (GNP)

Total income earned by a nation’s residents (nationals), regardless of production location.

Net National Product (NNP)

GNP minus depreciation; income after accounting for wear and tear on capital.

National Income

Total income earned by residents from the production of goods and services.

Personal Income

Income received by households and non-corporate businesses before taxes.

Disposable Personal Income

Personal income remaining after taxes; income available for spending or saving.

Cost of Living

Amount of money needed to maintain a given standard of living based on prices of goods and services.

Inflation

A sustained rise in the overall price level of the economy.

Inflation Rate

Percentage change in a price index (e.g., CPI) from the previous period.

Consumer Price Index (CPI)

Index measuring the overall cost of a fixed basket of goods and services bought by a typical consumer.

Substitution Bias

CPI distortion arising because consumers switch to relatively cheaper goods not reflected in a fixed basket.

Introduction of New Goods

CPI distortion when new products increase variety and purchasing power, but the basket is slow to adjust.

Unmeasured Quality Changes

CPI distortion when product improvements or deteriorations alter value without full price adjustment.

Nominal Interest Rate

The stated interest rate unadjusted for inflation; the rate banks quote.

Real Interest Rate

Nominal interest rate minus inflation; reflects the true increase in purchasing power for lenders and borrowers.

Marxist Economics

Heterodox school analyzing capitalism’s class struggles, exploitation, and inherent crisis tendencies (Karl Marx).

Austrian School

School emphasizing free markets, private property, and subjective value; views prices as outcomes of individual preferences.

Keynesianism

Theory asserting that markets may not clear in the short run; advocates fiscal policy to manage demand and unemployment (J. M. Keynes).

Monetarism (Money Neutrality)

View that changes in money supply affect price levels but not real variables in the long run; stresses monetary control.

Limitations of GDP

GDP omits non-market activity, income distribution, environmental quality, and leisure, so it is an imperfect welfare measure.

Injections (G, X, I)

Flows—government spending, exports, and investment—that add spending to the circular flow of income.