Economics

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116 Terms

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Price Level

A weighted average of the prices of all goods and services

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Price Index

A measure of the price level

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Consumer Price Index (CPI)

  • A widely cited index number for the price level; the weighted average of prices of a specific set of goods and services purchased by a typical household.

  • Calculated (Total dollar expenditure on the market basket int the current year/Total dollar expenditure on the market basket in the base year)*100

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Base Year

The year was chosen as a point of reference or basis of comparison for prices in other years; a benchmark year.

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Changes in Prices

Calculated by subtracting CPI from the later year and earlier year, dividing the value by the earlier value of the CPI, and multiplying by 100.

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Inflation

An increase in the price level and is usually measured annually. The inflation rate is the positive percentage change in the price level on an annual basis.

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Real Income

  • A person’s nominal income (current income) is adjusted for any price change.

  • Is computed as follows: =(Nominal Income/CPI)*100

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GDP Implicit Price Deflator

  • Is asked upon all goods and services produced in a economy

  • CPI is based on a representative group of goods and services purchased by typical household

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Unemployment

  • The total population of the United States can be divided into two broad groups which are…

  • One group consists of persons who are: under 16 years of age, in the armed forces, or institutionalized

  • The second group, which consists of all others in the total population, is called the civilian non-institutional population.

  • People available for work but not employed in the last 4 weeks

  • Job losers, job leavers, re-entrants, new entrants

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Employed

  • People who did any work for profit

  • People who contribute to a family business without pay for 15 hours or more

  • People who are temporarily absent from work

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Unemployment rate

  • Percentage of the civilian force that is unemployed

  • This can be found by dividing the number of unemployed people by the civilian labor force

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Labor force participation rate

  • The percentage of the civilian non-institutional population that is in the civilian labor force

  • This can be found by dividing the civilian labor force by the civilian non-institutional population

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Discouraged Workers

  • They are former workers, not actively looking for employment or looking to work.

  • Counted as unemployed

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Frictional unemployment

  • Unemployment is caused by things that impact the economy and market

  • Mostly related to people finding jobs that match their skillset

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Structural unemployment

  • Unemployment due to the elimination of some jobs which create other jobs for those who are unemployed don’t qualify for

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Natural Unemployment

  • Unemployment caused by frictional and structural factors in the economy

  • Unemployment that exists when an economy is operating at its full capacity

  • Frictional unemployment+Structural unemployment

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Full Employment

The condition that exists when the unemployment rate is equal to the natural unemployment rate

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Cyclical Unemployment Rate

The difference between the unemployment rate and the natural unemployment rate

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Gross Domestic Product (GDP)

  • The total market value of all final goods and services produced annually within a country’s borders.

  • Can be calculated through different approaches (Income, expenditure, and value-added)

  • Non-market goods, illegal, sales of used goods, trading of stocks, government payments (Social Security), and leisure time.

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Expenditure Approach

  • Add the amount of money spent by buyers of final goods and services

  • Avoid double counting

  • Do not count intermediate goods

  • Is the goods in the hands of their final users

  • Has 4 sectors (Household, Business, Government, and Foreign)

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Double Counting

An error that occurs when a total is obtained by summing gross amounts instead of net amounts

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Income approach

  • Add the summer of all incomes earned in producing goods and services

  • Total purchases equals GDP and total purchases equals total income, GDP equals total income

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Value-added approach

Add the value added at each stage of production of all goods and services

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GDP and Bads argument

  • GDP does not include the negative effects of goods

  • Some argue that not including negative effects makes GDP unreliable and overstates our economic welfare

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Household Sector

  • Involves consumption of household goods

  • This can be food, housing, education, investments, savings, etc

  • Durable goods, non durable, and services

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Business Sector

  • Involves investments

  • Talks about business investing in equipment, production, profits, and employment.

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Government Sector

  • Involves government purchases

  • Involves the spending of goods and services by the government

  • Government investments in infrastructure like bridges, roads, etc

  • Transfer payments like social security, unemployment, and welfare are excluded from GDP

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Foreign Sector

  • Talks about net exports

  • Brings up exports, imports, and foreign investments

  • Imports are subtracted from the GDP as they represent spending

  • Exports are added to the GDP as its income generated

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Durable goods

Durable goods are goods that are expected to last for more than 3 years, such as appliances

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Non-durable goods

Non-durable goods are goods that are not expected to last for more than three years, such as food

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Services

Not physical goods, such as entertainment services

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Fixed investment

Newly produced capital goods, business purchases of capital goods, such as machinery and factories

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Inventory Investment

Changes in business inventories (stock of unsold goods)

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Beureu of Economic Analysis

  • Agency of the U.S. department of commerce.

  • Assembles data which is used to calculate GDP

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National Income

  • Total income earned by U.S. citizens and businesses no matter where they reside or are located

  • National income is the sum of the payments to resources (Land, labor, capital, and entrepreneurship)

  • Proprietor income + Corporate profits + Rental income + Net interest

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Compensation of Employees

Wages and salaries paid to employees plus employers contributions to social security and employee benefit plans, etc

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Proprietors Income

Include all forms of income earned by self-employed individuals and the owner of unincorporated business including unincorporated farmers

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Corporate profits

Corporate profits include all the income earned by the stockholders of corporations

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Rental Income

  • Rental income is the income received by individuals for the use of their non-monetary assets (land, houses, offices)

  • It also includes returns to individuals who hold copyrights and patents

  • Finally, it includes an impute value to owner-occupied houses

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Net interest

The interest income received by the U.S. households and governments minus the interest they paid out

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National Income to GDP

  • Doesn’t include income earned from the rest of the world

  • Involves income armed by the rest of the world, indirect business taxes, capital consumption allowance (depreciation, and statistical discrepancy (variations in data)

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Depreciation (GDP terms)

  • The estimated amount of capital goods used up in production through natural wear, obsolescence, or destruction

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Net Domestic Product (NDP)

  • Measures the total value of new goods available in the economy in a given year after worn-out capital goods gave been replaced

  • GDP - Depreciation/Capital consumption allowance

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Personal income

  • Equal to national income if…

  • Undistributed corporate profits, social insurance taxes, and corporate profits taxes aren’t counted

  • Transfer payments are counted

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Disposable Income

Equal to personal income - personal taxes

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Real GDP

  • The value of the entire output produced annually within a country’s borders, adjusted for price changes (Inflation)

  • = The summation of base year prices multiplied by current year quantities

  • = C+I+G+(X-M)

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Economic Growth

is measured by increases in Real GDP

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Percentage change in Real GDP

  • Real GDP of later year - Real GDP of earlier year, divided by Real GDP earlier year, all multiplied by 100

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Business Cycle Peak

  • At the peak of the business cycle, Real GDP is at a temporary high

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Business Cycle Contraction

Represents a decline in Real GDP

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Business Cycle Trough

  • The low point in Real GDP, just before it begins to turn up

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Business Cycle Recovery

  • The recovery is the period where real GDP is rising. It begins at the through and ends at the initial peak

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Business Cycle Expansion

  • The expansion phase refers to increases in Real GDP beyond the recovery. In the exhibit, it refers to increases in real GDP above Q

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Business Cycle Recession

  • Two consecutive quarter declines in Real GDP constitutes a recession

  • The best way to describe is a continuous drop in the linee

  • Can also be identified as a period of time between a peak and a through, lasting months to more than a year

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Pareto efficiency/optimality

An economic state is where resources are allocated most efficiently, and it is obtained when a distribution strategy exists in which one party’s situation cannot be improved without making another party’s situation worse.

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Pareto Optimal Outcome

  • Cannot be improved upon without hurting at least someone else

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Pareto improvement

  • An action done in an economy that harms no one and helps at least one person.

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Aggregate Demand

  • The buying side of the economy

  • The quantity demanded of all goods and services (Real GDP) at different price levels, ceteris paribus

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Aggregate supply

The producing side of the economy

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Short-run aggregate supply

Is the production in the short run

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Long-run aggregate

Supply is production in the long run

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Aggregate Demand Curve

  • A curve that shows the quantity demanded of all goods and services (Real GDP) at different price levels, ceteris paribus.

  • The aggregated demand curve is downward sloping specifying an inverse relationship between the price level and the quantity demanded of Real GDP

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Real Balance Effect

  • The change in the purchasing power of dollar-denominated assets that result from a change in the price level

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Monetary Wealth

  • The value of a person’s monetary assets.

  • Readily available resources/money

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Wealth

  • Different from monetary wealth, refers to the value of all assets owned, both monetary and non-monetary

  • As this value goes up, consumption increases and so does aggregate demand, as it falls so does consumption and aggregate demand

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Purchasing Power

  • The quantity of goods and services that can be purchased with a unit of money. Purchasing power and the price level are inversely related

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Interest Rate Effect

  • The change in foreign sector spending as the price level changes

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Change in Quantity Demanded

  • In terms of Real GDP

  • Result of a change in the price level

  • Graphically represented through the movement of a point on the aggregate demand line

  • Real Balance, Interest Rate, and the International Trade Effect all have an impact on the change in the quantity demanded

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Change in Aggregate Demand

  • Graphically shown as a shift in the aggregated demand curve from aggregate demand line 1 to aggregate demand line 2

  • Caused by a change in spending

  • GDP=C+I+G+(X-M)

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C

  • Stands for Consumption

  • Manipulates aggregate demand through wealth, price, income, interest rate, income tax

  • One of the biggest functions in total spending

  • Depends on disposable income

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I

  • Stands for Investment

  • Influences aggregate demand through interest rates, future sales, and business taxes

  • As interest rates fall, prices of an investment project fall, encouraging aggregate demand and business investment. This works vice versa as well.

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G

  • Stands for government spending

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X

  • Stands for Exports

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M

  • Stands for Imports

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Net Exports

  • Is the value of exports minus imports

  • Influences GDP through foreign real national income and the exchange rate

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Depreciation (Exchange Rate)

  • A decrease in the value of one currency relative to other currencies

  • Occurs when the exchange rate goes down in the market in relation to another currency; less purchasing power

  • Countries with floating exchange rates see this phenomenon as their exchange rate is influenced by global investment

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Appreciation (Exchange Rate)

  • An increase in the value of one currency relative to other currencies

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Devaluation

  • This happens in countries with a fixed exchange rate when the government decides what the currency is worth in comparison to other countries.

  • It isn’t as popular as it demands a strict exchange rate and the country needs to buy and sell its currency to keep a fixed exchange rate

  • Popular before the great depression

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Velocity

  • The average number of times a dollar is spent to buy final goods and services in a year

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Short Run Aggregate Supply (SRAS) curve

  • A curve that shows the quantity supplied of all goods and services (Real GDP) at different price levels, Ceteris Paribus

  • Upward sloping, specifying a direct relationship between the price level and the quantity supplied of Real GDP

  • Slopes upwards due to sticky wages and worker misconceptions

  • Affected by Wage rates, prices of non labor inputs, productivity, supply shocks

  • Non labor inputs, a positive impact will shift the line right, negative vice versa

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Sticky Wages

  • Refers to wages that don’t adjust quickly enough to compensate for economic conditions such as inflation

  • Wages are locked dude to labor contracts, social conventions, or notions of fairness

  • An increase in its price level will result in an increase in the output of goods, as the price level rises the quantity supplied of goods and services rises

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Real Wage

  • This can be found by dividing the nominal wage by the price level

  • As it increases the quantity of labor supplied also increases and vice versa

  • A Lower wage rate results in a shift of the SRAS line towards the right, and vice versa

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Worker Misconceptions

  • The works misconception of what their real wage is and how it changes

  • This is demonstrated by an upward sloping SRAS curve

  • This will ultimately affect production and it will begin to drop

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Wage Rates

  • Is impacted by the rise or fall equilibrium

  • This can be understood through profit per unit price per unit - cost per unit

  • Higher wage rates = Higher costs = Less wanting to produce goods works vice versa

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Productivity

  • The output produced per unit of input employed over some period of time

  • An increase cause a rightward shift in the SRAS curve

  • A decrease causes a leftward shift in the SRAS curve

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Supply Shocks

  • Natural or institutional changes that affect aggregate supply

  • Could be hurricanes, for example, effecting production or just a general decline in production

  • Negative impacts cause a leftward SRAS curve and vice versa

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Short Run Equiblirum

Where the aggregate demand and the SRAS curve both meet

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Long Run Aggregate Supply (LRAS)

  • A vertical line at the level of natural Real GDP

  • Is the representation of Economic production after all adjustments have taken place such as misconceptions and adjustments

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Long-run Equilibrium

  • The condition that exists in the economy when wages and prices have adjusted to their final equilibrium

  • Is visualized with the AD line intersecting the LRAS line

  • Can also be used to represent the potential output of the economy

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Short-Run Equilibrium

  • When the SRAS line and AD lines intersect

  • When real GDP equals the short run quantity supplied

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Classical Economics

  • An era of economics during the 1750s-1900s

  • Ideas and concepts are still used to this day from this era

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Say’s Law

  • Supply creates its own demand. The production created demand sufficient to purchase all goods and services produced.

  • The law implies there cant be under or over-production, as something is always expected in return for a good or service, which holds more true in a barter economy than in money

  • Consumption drops, supply rises; so investment increases subsequently

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Recessionary (Contractionary) Gap

  • Real GDP is less than Natural Real GDP

  • The unemployment rate is greater than the natural unemployment rate

  • Usually in short-run equilibrium

  • Whenever Q1 is more leftwards in comparison to Qn

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Inflationary (Expansionary) Gap

  • Real GDP is greater than Natural Real GDP

  • The unemployment rate  is less than the natural unemployment rate

  • Usually in short-run equilibrium

  • Whenever Q1 is more rightwards in comparison to Qn

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Long-Run Equilibrium

  • Real GDP is equal to Natural Real GDP

  • The unemployment rate is equal to the natural unemployment rate

  • Q1 = Qn

  • The economy is producing its natural real GDP or potential output

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Physical PPF (Production Possibilities Frontier)

  • Illustrates different combinations of goods the economy can produce given the physical constraints of finite resources and the current state of technology.

  • Can never be operated beyond as it is considered the most resources available

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  • Institutional PPF (Production Possibilities Frontier)

  • Illustrates different combinations of goods in the economy given that there are finite resources and with the current state of technology BUT with the addition of institutional constraints 

  • Will tend to be lower/smaller than the physical PPF as now there are more overall constraints 

  • If the economy operates beyond this, then the unemployment rate in the economy is lower than the natural unemployment rate

  • Can always be operated beyond as constraints are never truly effective

  • The economy at a natural unemployment rate if located on its PPF, due to the efficient use of resources

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Closing Recessionary Gap

  • Wage rates fall, SRAS1 moves rightwards to SRAS2

  • Price level falls and other factors like real balance, interest rate, and international trade effects increase the demand of Real GDP

  • SRAS eventually intercepts at LRAS, creating a long-run equilibrium

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Laissez-faire

A public policy not interfering with market activities in the economy

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Business Cycle Macroeconomics

Business cycle macroeconomics can be described as changes in real GDP with a fixed LARS curve