Studied by 4 peoplebusiness cycle
the economy's relatively short-term movement in and out of recession
Depreciation
the process by which capital ages over time and therefore loses its value
Depression
an especially lengthy and deep decline in output
double counting
a potential mistake to avoid in measuring GDP, in which output is counted more than once as it travels through the stages of production
durable good
long-lasting good like a car or a refrigerator
exchange rate
the price of one currency in terms of another currency
final good and service
output used directly for consumption, investment, government, and trade purposes; contrast with “intermediate good”
GDP per capita
GDP divided by the population
gross domestic product (GDP)
the value of the output of all final goods and services produced within a country in a year
gross national product (GNP)
includes what is produced domestically and what is produced by domestic labor and business abroad in a year
intermediate good
output provided to other businesses at an intermediate stage of production, not for final users; contrast with “final good and service”
Inventory
good that has been produced, but not yet been sold
national income
includes all income earned
net national product (NNP)
GNP minus depreciation
nominal value
the economic statistic actually announced at that time, not adjusted for inflation; contrast with real value
nondurable good
short-lived good like food and clothing
Peak
during the business cycle, the highest point of output before a recession begins
real value
an economic statistic after it has been adjusted for inflation; contrast with nominal value
Recession
a significant decline in national output
Service
product which is intangible (in contrast to goods) such as entertainment, healthcare, or education
standard of living
all elements that affect people’s happiness, whether people buy or sell these elements in the market or not
Structure
building used as residence, factory, office building, retail store, or for other purposes
trade balance
gap between exports and imports
trade deficit
exists when a nation's imports exceed its exports and it calculates them as imports – exports
trade surplus
exists when a nation's exports exceed its imports and it calculates them as exports – imports
Trough
during the business cycle, the lowest point of output in a recession, before a recovery
aggregate production function
the process whereby an economy as a whole turns economic inputs such as human capital, physical capital, and technology into output measured as GDP per capita
capital deepening
an increase by society in the average level of physical and/or human capital per person
compound growth rate
the rate of growth when multiplied by a base that includes past GDP growth
contractual rights
the rights of individuals to enter into agreements with others regarding the use of their property providing recourse through the legal system in the event of noncompliance
Convergence
pattern in which economies with low per capita incomes grow faster than economies with high per capita incomes
human capital
the accumulated skills and education of workers
Industrial Revolution
the widespread use of power-driven machinery and the economic and social changes that occurred in the first half of the 1800s
Infrastructure
a component of physical capital such as roads and rail systems
Innovation
putting advances in knowledge to use in a new product or service
Invention
advances in knowledge
labor productivity
the value of what is produced per worker, or per hour worked (sometimes called worker productivity)
modern economic growth
the period of rapid economic growth from 1870 onward
physical capital
the plant and equipment that firms use in production; this includes infrastructure
production function
the process whereby a firm turns economic inputs like labor, machinery, and raw materials into outputs like goods and services that consumers use
rule of law
the process of enacting laws that protect individual and entity rights to use their property as they see fit. Laws must be clear, public, fair, and enforced, and applicable to all members of society
special economic zone (SEZ)
area of a country, usually with access to a port where, among other benefits, the government does not tax trade
technological change
a combination of invention—advances in knowledge—and innovation
Technology
all the ways in which existing inputs produce more or higher quality, as well as different
adverse selection of wage cuts argument
if employers reduce wages for all workers, the best will leave
cyclical unemployment
unemployment closely tied to the business cycle, like higher unemployment during a recession
discouraged workers those who have stopped looking for employment due to the lack of suitable positions available
efficiency wage theory
the theory that the productivity of workers, either individually or as a group, will increase if the employer pays them more
frictional unemployment
unemployment that occurs as workers move between jobs
implicit contract
an unwritten agreement in the labor market that the employer will try to keep wages from falling when the economy is weak or the business is having trouble, and the employee will not expect huge salary increases when the economy or the business is strong
insider-outsider model
those already working for the firm are “insiders” who know the procedures; the other workers are “outsiders” who are recent or prospective hires
labor force participation rate
this is the percentage of adults in an economy who are either employed or who are unemployed and looking for a job
natural rate of unemployment
the unemployment rate that would exist in a growing and healthy economy from the combination of economic, social, and political factors that exist at a given time
out of the labor force
those who are not working and not looking for work—whether they want employment or not; also termed “not in the labor force”
relative wage coordination argument
across-the-board wage cuts are hard for an economy to implement, and workers fight against them
structural unemployment
unemployment that occurs because individuals lack skills valued by employers
Underemployed
individuals who are employed in a job that is below their skills
unemployment rate
the percentage of adults who are in the labor force and thus seeking jobs, but who do not have jobs
adjustable-rate mortgage (ARM)
a loan a borrower uses to purchase a home in which the interest rate varies with market interest rates
base year
arbitrary year whose value as an index number economists define as 100; inflation from the base year to other years can easily be seen by comparing the index number in the other year to the index number in the base year—for example, 100; so, if the index number for a year is 105, then there has been exactly 5% inflation between that year and the base year
basket of goods and services
a hypothetical group of different items, with specified quantities of each one meant to represent a “typical” set of consumer purchases, used as a basis for calculating how the price level changes over time
Consumer Price Index (CPI)
a measure of inflation that U.S. government statisticians calculate based on the price level from a fixed basket of goods and services that represents the average consumer's purchases
core inflation index
a measure of inflation typically calculated by taking the CPI and excluding volatile economic variables such as food and energy prices to better measure the underlying and persistent trend in long-term prices
cost-of-living adjustments (COLAs)
a contractual provision that wage increases will keep up with inflation
Deflation
negative inflation; most prices in the economy are falling
Employment Cost Index
a measure of inflation based on wages paid in the labor market
GDP deflator
a measure of inflation based on the prices of all the GDP components
Hyperinflation
an outburst of high inflation that often occurs (although not exclusively) when economies shift from a controlled economy to a market-oriented economy
index number
a unit-free number derived from the price level over a number of years, which makes computing inflation rates easier, since the index number has values around 100
Indexed
a price, wage, or interest rate is adjusted automatically for inflation
Inflation
a general and ongoing rise in price levels in an economy
International Price Index
a measure of inflation based on the prices of merchandise that is exported or imported
Producer Price Index (PPI)
a measure of inflation based on prices paid for supplies and inputs by producers of goods and services
quality/new goods bias
inflation calculated using a fixed basket of goods over time tends to overstate the true rise in cost of living, because it does not account for improvements in the quality of existing
substitution bias
an inflation rate calculated using a fixed basket of goods over time tends to overstate the true rise in the cost of living, because it does not take into account that the person can substitute away from goods whose prices rise considerably
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