Ch 3: The Goods Market

Flashcards covering key vocabulary from Chapter 3: The Goods Market in Macroeconomics Ninth Edition.

The Goods Market

The interactions among demand, production, and income, where changes in demand lead to changes in production, which lead to changes in income, and in turn lead to changes in demand for goods.

Consumption (C)

Goods and services purchased by consumers.

Investment (I) or Fixed Investment

The sum of nonresidential investment and residential investment.

Government Spending (G)

Purchases of goods and services by the federal, state, and local governments, excluding government transfers.

Exports (X)

Purchases of a country's goods and services by foreigners.

Imports (IM)

Purchases of foreign goods and services by domestic consumers, firms, and the government.

Net Exports or Trade Balance

The difference between exports and imports. A trade surplus occurs when exports exceed imports, and a trade deficit when imports exceed exports.

Inventory Investment

The difference between production and sales.

Total Demand for Goods (Z)

Defined as the sum of consumption, investment, government spending, and net exports (X-IM).

Closed Economy

An economy with no international trade, meaning exports and imports are zero.

Disposable Income

The income that remains once consumers have received government transfers and paid their taxes (Y - T).

Consumption Function

A behavioral equation that captures the relationship between consumption and disposable income.

Propensity to Consume (c1)

The effect of an additional dollar of disposable income on consumption, representing how much of an increase in disposable income is spent on consumption.

c0

What people would consume if their disposable income equals zero; it reflects changes in consumption for a given level of disposable income.

Endogenous Variables

Variables that are explained within an economic model and depend on other variables in that model.

Exogenous Variables

Variables that are not explained within an economic model but are instead taken as given.

Fiscal Policy

The choice of taxes and spending by the government (represented by G and T).

Equilibrium Condition in the Goods Market

The condition that the production of goods (Y) must be equal to the demand for goods (Z).

Autonomous Spending

The part of demand for goods that does not depend on income (Y).

Multiplier

A factor by which a change in autonomous spending affects equilibrium output; it is larger when the propensity to consume (c1) is closer to 1.

Econometrics

The set of statistical methods used in economics to estimate economic relationships and test theories.

Dynamics of Adjustment

The process by which output adjusts over time in response to changes in demand, depending on how and when firms revise their production schedules.

Private Saving (S)

The income remaining for consumers after they pay for consumption and taxes (Y - T - C).

Public Saving

The difference between taxes and government spending (T - G). It equals a budget surplus if positive and a budget deficit if negative.

IS Relation

A condition for equilibrium in the goods market stating that investment (I) must equal saving (the sum of private saving S and public saving T - G).

Propensity to Save

The fraction of an additional dollar of disposable income that is saved, equal to (1 - c1).

Paradox of Saving

The theory that if consumers decide to save more, output may decrease, and aggregate saving may not change, as the decrease in consumption reduces demand and thus income.