The Economy in the Long-Run - Vocabulary Flashcards (ECON102)

Vocabulary flashcards covering key macroeconomic concepts from the notes on the long-run economy, the labour market, potential GDP, and money.

Production possibilities frontier

A boundary showing the maximum feasible output combinations given available resources and technology (trade-offs).

Production function

The relationship that shows how real GDP is produced from inputs such as capital and labour, with diminishing returns.

Demand for labour

The quantity of labour that firms are willing to hire at each real wage rate; downward sloping with respect to the wage.

Supply of labour

The quantity of labour that households plan to work at each real wage rate; upward sloping with respect to the wage.

Market equilibrium (labour market)

The point where quantity of labour demanded equals quantity of labour supplied; in macro terms, corresponds to full employment and Real GDP = Potential GDP.

Potential GDP

The level of real GDP when all factors of production are fully employed; determined by the aggregate production function and aggregate labour market.

Aggregate Production Function

The relationship showing how real GDP changes as the quantity of labour changes, subject to diminishing returns.

Leisure

Time spent not working; giving up leisure increases labour supplied and thus potential output.

Aggregate Labour Market

A single macro labour market that determines the total quantity of labour employed and total real GDP.

Real wage rate

The price of labour measured in terms of goods and services (wages adjusted for inflation).

Quantity of labour demanded

Total hours of labour that firms hire; depends on the real wage rate; downward sloping.

Quantity of labour supplied

Total hours households plan to work; depends on the real wage rate; upward sloping.

Shortage of labour

When labour demanded exceeds labour supplied; the real wage rises to restore balance.

Surplus of labour

When labour supplied exceeds labour demanded; the real wage falls to restore balance.

Labour market equilibrium

When there is no shortage or surplus; associated with full employment, Real GDP = Potential GDP, and unemployment at the natural rate.

Minimum wage

A price floor applied to the labour market; a legal minimum wage; can have effects if set above equilibrium.

Price floor

A regulation that sets a minimum price; in labour markets, it is the minimum wage.

Deadweight loss

The loss of total surplus due to inefficiency, such as unemployment caused by a minimum wage.

Inefficiency of a minimum wage

Minimum wage can reduce total surplus by creating unemployment, reducing firm and worker surplus, and causing deadweight loss.

Money

A medium of exchange, a unit of account, and a store of value; anything generally accepted as payment.

Medium of exchange

An item generally accepted to facilitate transactions, avoiding barter.

Unit of account

A standard measure for stating prices of goods and services.

Store of value

Money can be held and exchanged later for goods and services.

Currency

Notes and coins held by individuals and businesses; government declares them as money; reserves held by banks are not counted as currency.

Deposits

Bank deposits that can be used to make payments; money stored in banks and depository institutions.

M1

Official money measure: currency plus cheque deposits owned by individuals and businesses.

M2

M1 plus short-term and medium-term deposits (savings deposits and money market funds).

M3

M2 plus longer-term deposits (e.g., pension funds).

Full employment

The condition in which the economy operates at potential GDP with unemployment at the natural rate (no cyclical unemployment).

Unemployment natural rate

The rate of unemployment consistent with full employment, comprising frictional and structural unemployment.

Labour productivity

Real GDP produced per hour of labour; increases when capital, skills, or technology improve.

Physical capital growth

An increase in capital per worker that raises labour productivity.

Human capital growth

Increase in the collective skills and knowledge of workers, a key source of productivity growth.

Technological advances

New technologies and methods that raise productivity and potential GDP.

Working-age population

People in the economy who are of working age and able to work.

Employment-to-population ratio

The fraction of the working-age population that is employed.

Average hours per worker

The typical number of hours worked by each employed worker, influencing total labour input.