IB Economics SL 3.1-3.3 Key Terms

memorize these definitions yo

National income accounting

The process by which an economy’s income/output is measured.

National income statistics

Indicate how living standards have improved over time

Economic growth

an increase in the value of total output produced in an economy over time.

Leakages

Instances where money is withdrawn and not spent in consumption within the circular flow of income.

Injections

Represent introductions of money into the circular flow of income.

GDP

The value of all final goods and services produced within a country in one year.

Nominal GDP

GDP measured in current prices

Real GDP

GDP expressed in constant, or unchanging dollars.

GDP per capita

is a measure of a country’s economic output that accounts for its number of people.

GNI (Gross National Income)

GDP + Net property income from abroad

Purchasing power parity (PPP)

A theoreticaly exchange rate that allows you to buy the same amount of goods and services in every country.

Aggregate demand

The value of total demand for all goods and services in the economy per time period.

Aggregate supply

The amount of goods and services that firms will produce in an economy at different price levels.

Unemployment

Refers to people of working age who are actively looking for a job but are not employed.

Cyclical unemployment

Unemployment that arises from a downturn int he business cycle or a fall in aggregate demand.

Structural unemployment

When the demand for products in a particular industry falls, causing a permanent decline in labor demand.

Frictional unemployment

Occurs when workers are in transition between jobs due to the time delay between

Seasonal unemployment

Caused by changes in demand at different times of the year.

Natural rate of unemployment

All types of unemployment except cyclical.

Inflation

a sustained increase in the general price level

Deflation

a sustained decrease in the general price level

Disinflation

a decrease in the rate of inflation

Consumer Price Index

A weighted index of average consumer prices of goods and services over time.

Demand-Pull Inflation

Caused by increases in aggregate demand

Cost-Push Inflation

caused by decreases in aggregate supply.

What causes deflation?

decreases in aggregate demand or increases in short-run aggregate supply.

Real-balance effect

When the price level decreases, the real value of money increases, making consumers feel wealthier and prompting them to increase spending, increasing aggregate demand.

Interest-rate effect

When interest rates fall, it becomes more “cheaper” to borrow money, encouraging consumers to increase spending, increasing aggregate demand.

Foreign trade effect

At higher price levels, countries sell less because they’re less attractive to foreign buyers, decreasing aggregate demand.

Recession

A fall in GDP for two successive quarters.

Four stages of the business cycle

peak, trough, expansion, contraction

Positive output gap (inflationary gap)

When real GDP is beyond full employment level — less unemployment than the natural rate of unemployment.

Negative output gap (recessionary gap)

When real GDP is below full employment level — more unemployment than the natural rate of unemployment.

What are three alternative measures of well-being?

OECD Better Life Index, Happy Planet Index, World Happiness Index

Full Employment

when an economy has no cylical unemployment — where virtually all who are willing and able are employed.

Natural rate of unemployment

The level of unemployment when an economy is operating at its full employment level of output. This is when there is no cyclical unemployment.

What are some personal costs to unemployment?

stress, low self-esteem, poverty, family breakdown

What are some social costs to unemployment?

rise in crime & anti-social behavior, indebtedness, social deprivation and degradation

What are some economic costs to unemployment?

fall in real GDP, loss of tax revenue, increased benefit spending, lower incomes, unequal impact

Why is aggregate supply upward sloping?

As firms produce more, the cost to produce a good or service goes down, making producing more of a product more profitable.