Erhardt Macroeconomics Final Exam

Economics

The structure of economic activity in a community, region, a country, a group of countries, or the world.

Gross Domestic Product (GDP)

The market value of all final goods and services produced in the nation during a particular period- usually a year.

Flow Variable

A variable that measures something over an interval of time, such as your income per week.

Stock Variable

A variable that measures something at a particular point in time, such as the amount of money you have with you right now.

Mercantilism

The incorrect theory that a nation's economic objective should be to accumulate precious metals in the public treasury; this theory prompted trade barriers to cut imports; but other countries retaliated reducing trade and the gains from specialization

Expansion

A period during which the economy grows as reflected by rising output, employment, income, and other aggregate measures

Contraction

A period during which the economy declines as reflected by falling output, employment, income, and other aggregate measures.

Depression

A severe and prolonged reduction in economic activity as occurred in the 1930's

Recession

A period of decline in economic activity lasting more than a few months, as reflected by falling output, employment, income, and other aggregate measures (generally 3 months or more)

Inflation

An increase in the economy's average price level

Leading Economic Indicators

Variables that predict, or lead to, a recession or recovery; examples include consumer confidence, stock market prices, business investment, and big-ticket purchases, such as automobiles and homes

Coincident Economic Indicators

Variables that reflect peaks and throughs in economic activity as they occur; examples include employment, personal income, and industrial production

Lagging Economic Indicators

Variable that follow, or trail, changes in overall economic activity; examples include the interest rate and the average duration of unemployment.

Aggregate Output

A composite measure of all final goods and services produced in an economy during a given period; real GDP.

Aggregate Demand

The relationship between the economy's price level and aggregate output demanded with other things constant.

Price Level

A composite measure reflecting the prices of all goods and services in the economy relative to the prices in a base year.

Real Gross Domestic Product (Real GDP)

The economy's aggregate output measured in dollars of constant purchasing power. (Takes into account inflation)

Aggregate Demand Curve

A curve representing the relationship between the economy's price level and real GDP demanded per period (other things constant).

Aggregate Supply Curve

A curve representing the relationship between the economy's price level and real GDP supplied per period (other things constant).

Higher Level of GDP

1. More goods and services in the economy

2. More people probably employed

Federal Budget

A plan for federal government outlays and revenues of a specific period, usually a year

Federal Budget Deficit

A flow variable that measures the amount by which federal government outlays exceed federal government revenues in a particular period, usually a year.

Demand-Side Economics

Macroeconomic policy that focuses on shifting the aggregate demand curve as a way of promoting full employment and price stability

Fiscal Policies

Government spending and taxes

Monetary Policies

Central bank, independent of our government (Federal Reserve Bank (FED))

Stagflation

A contraction, or stagnation of a nation's output accompanied by inflation in the price level.

Supply-Side Economics

Macroeconomic policy that focuses on a rightward shift of the aggregate supply curve through tax cuts or other changes that increase production incentive

Expenditure Approach to GDP

Calculating GDP by adding up all spending on all final goods and services produced in the nation during the year.

Income approach to GDP

Calculating GDP by adding up all earnings from resources used to produce output in the nation during the year.

Final goods and services

Goods and services sold to final, or end, users.

Intermediate goods and services

Goods and services purchased by firms for further reprocessing and sale

Double Counting

The mistake of including both the value of intermediate products and the value of the final products in calculating gross domestic product; counting the same production more than once.

Consumption

Household purchases of final goods and services except for new residences which count as investment.

Investment

The purchase of new plants, new equipment, new buildings, and new residences, plus net additions to inventories.

Physical Capital

Manufacturing items used to produce goods and services; include new plants and new equipment

Residential Construction

Building new homes or dwelling places

Inventories

Producers' stocks of finished and in-process goods

Government Purchases

Spending for goods and services by all levels of government, government outlays minus transfer payments

Net exports

The value of a country's exports minus the value of its imports.

Aggregate Expenditure

Total spending on final goods and services in an economy during a given period, usually a year

Aggregate Income

All earnings of resource suppliers in an economy during a given period, usually a year.

Net Domestic Product

Gross domestic product minus depreciation

Nominal GDP

GDP based on prices prevailing at the time or production

Base Year

The year with which other years are compared when constructing an index; the index equals 100 in the base year.

Price Index

A number that shows the average prices of products; changes in a price index over time show changes in the economy's average price level. (Inflation)

Consumer Price Index (CPI)

A measure of inflation based on the cost of a fixed market basket of goods and services.

GDP Price Index

Measures the average price of all goods and services produced in the economy

Chain-Weighted System

An inflation measure that adjusts the weights from year to year in calculating a price index, thereby reducing the bias caused by a fixed-price weighting system.

Value Added

At each stage of production, the selling price of a product minus the cost of intermediate goods purchased from other firms

Disposable Income (DI)

The income households have available to spend or to save after paying taxes and receiving transfer payments.

Net Taxes (NT)

Taxes minus transfer payments

Financial Markets

Banks and other financial institutions that facilitate the flow of funds from savers to borrowers.

Injection

Any spending other than by households or an income other than from resource earnings; includes investments, government purchases, exports and transfer payments

Leakage

Any diversion of income from the domestic spending stream; including saving, taxes, and imports

Underground Economy

Market transactions that go unreported either because they are illegal or because people involved want to evade taxes.

Depreciation

The value of capital stock used up to produce GDP or that becomes obsolete during the year

Labor Force

The 16 years of age and older who are either working or looking for work

Unemployment Rate

The number unemployed as a percentage of the labor force.

Discouraged Workers

Those who drop out of the labor force in frustration because they can't find work

Labor Force Participation Rate

The labor force as a percentage of the adult population

Long-Term Unemployment

Those looking for work for 27 weeks or longer.

Frictional Unemployment

Unemployment that occurs because job seekers and employees need time to find each other

Seasonal Unemployment

Unemployment caused by seasonal changes in the demand for certain kinds of labor

Structural Unemployment

Unemployment because 1) the skills in demand do not match those of the unemployed, or 2) the unemployed do not live where jobs are

Cyclical Unemployment

Unemployment that fluctuates with the business cycle, increasing during contractions and decreasing during expansions

Full Employment

Employment level when there is no cyclical unemployment

Unemployment Benefits

Cash transfers to those who lose their jobs and actively seek employment

Underemployment

Workers are overqualified for their jobs or work fewer hours than they prefer to

Hyperinflation

A very high rate of inflation

Deflation

A sustained decrease in the price level

Disinflation

A reduction in the price of inflation

Demand-Pull Inflation

A sustained rise in the price cause by a rightward shift of the aggregate demand curve

Cost-Push Inflation

A sustained rise in the price cause by a leftward shift of the aggregate supply curve

Interest

The dollar amount paid by borrowers to lenders

Interest Rate

Interest per year as a percentage of the amount loaned

Nominal Interest Rate

The interest rate expressed in current dollars as a percentage of the amount loaned; the interest rate on the loan agreement

Real Interest Rate

The interest rate expressed in dollars of constant purchasing power as a percentage of the amount loaned; the nominal interest rate minus the inflation rate

COLA

Cost of living adjustments; the increase in a transfer payment or wage that reflects the increase in the price level

Productivity

The ratio of a specific measure of output such as real GDP, to a specific measure of input such as labor; in this case, productivity measures real GDP per hour of labor

Human Capital

Accumulated knowledge, skill, and experience of the labor force

Physical Capital

Machines, buildings, roads, modes of transportation, and other manufactured creations used to produce goods and services

Labor Productivity

Output per unit of labor; measured as real GDP divided by the hours of labor employed to produce that output

Per-Worker Production Function

The relationship between the amount of capital per worker in the economy and average output per worker

Capital Deepening

An increase in the amount of capital per worker' one source of rising labor productivity

Rules of the Game

The formal and informal institutions that promote economic activity; the laws, customs, conventions, and other institutional elements that determine transaction costs and thereby affect people's incentives to undertake production and exchange

Industrial Market Countries

Economically advanced capitalist countries of Western Europe, North America, Australia, New Zealand, and Japan, plus the newly industrialized Asian economies of Taiwan, South Korea, Hong Kong, and Singapore (4 dragons)

Developing Countries

Countries with a low living standard because of little human and physical capital per worker

Basic Research

The search for knowledge without regard to how that knowledge will be used

Applied Research

Research that seeks answers to particular questions or to apply scientific discoveries to develop specific knowledge (Epistemology)

Convergence

The theory predicting that the standard of living in economies around the world will grow more similar over time, with poorer countries eventually catching up with richer ones

Industrial Policy

The view that government- using taxes, subsidies, and regulations should nurture the industries and technologies of the future, thereby giving these domestic industries an advantage over foreign competition

Consumption Function

The relationship between consumption and income, (o.t.c.)

Marginal Propensity to Consume (MPC)

The fraction of a change in income that is spent on consumption; the change in consumption divided by the change in income that caused it

Marginal Propensity to Save (MPS)

The fraction of a change in income that is saved; the change in income that caused it

Saving Function

The relationship between saving and income (o.t.c.)

Nominal Wage

The wage measured in current dollars; the dollar amount on a paycheck

Real Wage

The wage measured in dollars of constant purchasing power; the wage measured in terms of the quantity of goods and services it will buy

Potential Output

The economy's maximum sustainable output, given the supply of resources, technology, and production incentives; the output level when there are no surprises about the price level

Natural Rate of Unemployment

The unemployment rate when the economy produces its potential output

Short Run

In macroeconomics, a period during which some resource prices, especially those of labor, are fixed by explicit or implicit agreements