ECON1102: Macroeconomics - Vocabulary Flashcards

Vocabulary flashcards covering key macroeconomic concepts from the lecture notes.

Scarcity

The limited nature of society's resources that creates trade-offs.

Economics

The study of how society manages scarce resources and how people interact.

Efficiency

Getting the most from scarce resources.

Equity

Fair distribution of economic prosperity among members of society.

Opportunity cost

What must be given up to obtain some item.

Marginal change

A small incremental adjustment to a plan of action.

Marginal benefit

The benefit created by a marginal change.

Marginal cost

The cost created by a marginal change.

Incentive

Something that induces a person to act.

Market economy

An economy that allocates resources through decentralized decisions in markets.

Invisible hand

The idea that markets allocate resources efficiently; requires rules and institutions to function.

Market failure

A situation where a market left on its own fails to allocate resources efficiently.

Market power

The ability of a single actor to influence market prices.

Externality (positive)

Uncompensated positive effect of one person’s actions on a bystander.

Externality (negative)

Uncompensated negative effect of one person’s actions on a bystander.

Positive statements

Claims that describe the world as it is.

Normative statements

Claims that prescribe how the world should be.

Productivity

Output per hour of a worker’s time.

Inflation

A general rise in prices, reducing purchasing power.

Business cycle

Irregular, largely unpredictable fluctuations in economic activity.

Circular-flow diagram

A visual model of how dollars flow in the economy between households and firms. Functions include goods and services, households, factors of production and firms.

Production possibilities frontier

A graph showing the maximum combinations of output given resources and technology.

Microeconomics

Study of how households and firms make decisions and interact in markets.

Macroeconomics

Study of economy-wide phenomena like inflation, unemployment, and growth.

Natural rate of unemployment

The long-run level of unemployment the economy normally experiences.

Cyclical unemployment

Unemployment arising from short-run fluctuations in the business cycle.

Labour force

Total number of workers who are employed plus unemployed.

Unemployment rate

Percentage of the labour force that is unemployed.

Labour-force participation rate

Proportion of the adult population in the labour force.

Discouraged workers

People who want to work but have given up looking for a job.

Classical unemployment

Unemployment caused by real wages above the market-clearing level.

Frictional unemployment

Unemployment due to the time it takes to match workers with jobs.

Structural unemployment

Unemployment due to a mismatch between skills and available jobs.

Unions

Worker associations that bargain with employers over wages and conditions.

Collective bargaining

Process by which unions and firms negotiate terms of employment.

Efficiency wages

Wages paid above the market-clearing level to boost productivity.

Job search

Process of workers finding appropriate jobs.

Unemployment benefit

Government program that partially protects incomes against job loss.

Deflation

A general decrease in prices; opposite of inflation.

GDP

The market value of all final goods and services produced within a country in a year.

GDP deflator

Price index for all domestically produced goods and services; used to convert nominal GDP to real GDP.

Nominal GDP

GDP measured at current prices.

Real GDP

GDP adjusted for price level changes (inflation) using a base year.

Consumption (C)

Household spending on final goods and services.

Investment (I)

Spending on new capital assets that increase productive capacity.

Government purchases (G)

Spending by the government on goods and services.

Net exports (NX)

Exports minus imports.

Y = C + I + G + NX

GDP identity showing how GDP is the sum of C, I, G, and NX.

Consumption function

Relation showing how consumption varies with income; typically upward sloping.

Marginal propensity to consume (MPC)

Share of an extra dollar of income that is spent on consumption.

Saving

Portion of income not spent.

Dissaving

Spending more than income in a period; drawing on savings or borrowing.

Permanent income

Long-term average income used to determine sustainable consumption.

Permanent income hypothesis

Idea that consumption is driven by permanent income rather than current income.

Consumption smoothing

Maintaining a steady path of consumption over time.

Life-cycle hypothesis

Idea that saving and spending vary across a person’s life due to income changes.

Real interest rate

Nominal interest rate minus inflation; reflects true purchasing power return.

Nominal interest rate

Stated interest rate without adjustment for inflation.

Money (three functions)

Medium of exchange, unit of account, and store of value.

Central bank

Bank that manages a country’s monetary policy and financial system.

Monetary policy

Policy through which the central bank controls the money supply and interest rates.

Open market operations

Purchasing or selling government securities to influence short-term rates.

Cash rate

Overnight interbank interest rate used as a monetary policy target (e.g., RBA).

Inflation expectations

What people anticipate about future inflation, influencing wage/price setting.

Demand-pull inflation

Inflation caused by excess demand in the economy.

Cost-push inflation

Inflation caused by rising costs or supply shocks.

Menu costs

Costs to sellers of changing prices.

Shoe-leather costs

Costs of holding less cash during inflation or uncertainty.

Inflation fallacy

Misbelief that inflation always destroys purchasing power.

Hyperinflation

Extremely high, accelerating inflation; rare.

CPI

Consumer price index; tracks average price paid by consumers for a basket of goods.

Core inflation

Inflation measure excluding volatile items like food and energy.

PPI

Producer price index; tracks prices of inputs into production.

Production function (Y = f(L, H, K))

Relation showing output as a function of labour (L), human capital (H), and physical capital (K).

Labour (L)

Total hours worked across the economy.

Human capital (H)

Accumulated knowledge and skills that raise productivity.

Physical capital (K)

Tools, machines, and structures used in production.

Constant returns to scale

Doubling inputs leads to a doubling of output.

Diminishing returns

Increasing one input while holding others constant yields smaller output gains.

Catch-up growth

Rapid growth that occurs when poorer economies invest in capital.

Steady state

When investment equals depreciation; capital stock stops growing.

Technological progress

Advances that shift the production function upward, increasing output.

Ideas

Knowledge that can be shared and can spur further innovation; non-excludable leads to imitation incentives.

labour force formula

employed + unemployed (excluding discouraged workers)

unemployment rate formula

(unemployed / labour force) x 100

labour force participation rate formula

(labour force / working age population) x 100

inflation rate formula

((price level this year - price level last year / price level last year) x 100

real interest rate formula

nominal interest rate - inflation rate

GDP (consumption) formula

Y = C + I + G + NX

GDP deflator formula

(nominal GDP / real GDP) x 100

today’s dollars formula

another time’s dollars x (price level today / price level at another time)

economic growth formula x 100

((GDP today - GDP last year) / GDP last year) x 100

MPC temporary formula

change in consumption / temporary change in income

MPC permanent formula

change in consumption / permanent change in income

unanticipated inflation

reduces real value of nominal claims and redistributes wealth from lenders to borrowers.

interdependence principle

the choices available to you in the future depend on the decisions you make today.

Marginal principle

breaks a “how many” question into a series of smaller marginal choices. Should I spend one more dollar when filling my car with fuel today?

cost-benefit principle

does the benefit of spending an extra dollar on consumption exceed the cost? if yes, then you should increase your consumption by a dollar.

rational rule for consumers

consume more today if the marginal benefit of a dollar of consumption today is greater than (or equal to) the marginal benefit of spending a dollar plus interest in the future.

hand to mouth consumers

spend their income as they receive it. MPC is 1