Econ 1000 Chapters 7-9

gross domestic product

the total market value of all final goods and services produced within a society over a certain period of time

intermediate good

a good used in the production process that is not a final good or service

consumption expenditures

purchases of newly produced goods and services by households (denoted by C)

private investment expenditures

purchases of newly produced goods and services by firms (e.g., spending on new plants and equipment) (denoted by I)

government purchases

purchases of newly produced goods and services by local, state, or federal government (denoted by G)

import

a good or service produced in a foreign country and produced by someone in the home country

export

a good or service produced in the home country and sold in a foreign country

net export

export minus imports (denoted by NX)

trade deficit

the excess of imports over exports

trade surplus

the excess of exports over imports

real GDP

the value of GDP computed using prices from an arbritrary base year

nominal GDP

the value of GDP computed using current period prices

real GDP per capita

value of real GDP divided by total population of the country

industrially advanced countries (IAC’s)

high income countries with primarily market based economies, large stocks of technologically advanced industrial capital, and a highly educated and skilled workforce (U.S, Norway, Australia, Germany, Japan)

less developed countries (LDC’s)

lower income countries which are held back by some combination of poor economic institutions, undeveloped industrial capital, and/or an uneducated and unskilled workforce (India, Ghana, Bangladesh, DRC)

economic development

improvements over time in a society’s quality of life and living standards

economic growth

sustained increases over time in a society’s value of Real GDP (outward shift on PPF, percentage increase in Real GDP)

GDP growth rate

annual percentage change in the value of real GDP

catch-up effect

conjecture that (all other factors fixed), the growth rates of less developed countries will exceed the growth rates of developed countries, allowing the less developed countries to “catch up” over time

rule of 72

the observations that a variable that grows at a constant rate of “X% per period” will double in value in approximately “(72/X) periods”

physical capital

machines, building, factories, and other equipment used in the production process

human capital

the knowledge, education, skills, experience, work ethic, inter-personal skills, and other attributes of workers which determine productivity

technology

the application of scientific and engineering principles to the problem of production

vicious cycle of poverty hypothesis

poor countries will remain poor since they do not have sufficient resources available to make the investments in capital which are necessary for economic growth

capital flight

tendency for wealthy people in poor countries to invest their financial capital abroad instead of at home

brain drain

tendency for the most highly talented people from developing countries to become educated and then move to an already wealthy country

rule of law

environment in which property rights and contracts are respected and administered fairly and transparently, without favoritism

crony capitalism

environment in which well-connected unscrupulous business people use corrupt political systems to their advantage in order to obtain preferential treatment from government (e.g., government contracts, subsidies, bailouts, tax loopholes)

inflation rate

the rate at which the overall price level increases on an annual basis

deflation

a general decrease in the level of overall prices (a realization of a negative inflation rate)

hyperinflation

an extremely high rate of inflation, generally above 100% per year

unemployment rate

the percentage of the labor force that is currently unemployed

misery index

economic indicator created by Arthur Okin, calculated by simply adding together the annual inflation rate and the unemployment rate

“The Great Inflation”

period of abnormally high inflation rates from early 1970s through the early 1980s

“The Great Misery”

period of time from November 1973 through June 1983 when the value of the misery index was 12.50 or higher every single month

stabilization function

attempts by government to minimize fluctuations in overall macroeconomic activity

fiscal policy

government policies related to spending and revenue generation

monetary policy

government policies which determine a nation’s money supply

budget deficit

occurs when government spending exceeds revenues

budget surplus

occurs when government revenues exceed spending

expansionary fiscal policy

increases in government spending or decreases in taxes with the aim of stimulating overall economic activity

contractionary fiscal policy

decreases in government spending or increases in taxes with the aim of dampening overall economic activity

crowding out

decreases in private spending that occur following increases in government spending

money supply

the amount of money in circulation in an economy

velocity of money

the number of times that a typical dollar is used in market transactions in a single year

overall price level

the average of all prices of goods/services produced

aggregate level of output

a measure of the real quantity of goods/services produced

equation of exchange

an identity which relates the money supply, velocity of money, overall price level, and aggregate level of output to each other

loanable funds market

the collection of all markets in which lenders and borrowers interact (mortgage markets, auto loan markets, consumer credit markets, business loan markets)

expansionary monetary policy

an increase in the money supply which provides a short term stimulus to the macro-economy, resulting in higher levels of output, employment, and incomes

contractionary monetary policy

a decrease in the money supply which dampens overall economic activity, resulting in lower levels of output, employment, and incomes in the short term (but greater stability in the long term)

central bank

entity which has the ability to alter the money supply of an economy (U.S: Federal Reserve)

fractional reserve banking system

a system in which at any point in time a commercial bank is only required to retain a portion of the money it has accepted as deposits

open market operations

buying and selling of U.S Treasury debt securities to and from the public

setting of reserve requirements

minimum restrictions on the amount of money that a bank must keep on hand at any point in time, in the form of either cash in its vault or deposits with the central bank

setting of discount rate

setting the interest rate that the Fed charges banks on short-term loans