Principles of Economics Final Exam Study Guide

Vocabulary-style flashcards covering the core Principles of Economics concepts, including GDP, unemployment, inflation, fiscal policy, and international trade as outlined in the study guide.

Gross Domestic Product (GDP)

The value of all final goods and services produced domestically.

Demand Measure of GDP Accounting

The sum of consumption, investment, government purchases, and the trade balance.

Inventories

A small category referring to goods produced by one business that have yet to be sold to consumers, sitting in warehouses or on store shelves.

Real GDP

A measure of productivity that adjusts for inflation, unlike nominal GDP.

GDP Limitations

GDP includes spending on recreation but does not cover leisure time; it includes production exchanged in the market but excludes production not exchanged in the market.

Per Capita GDP

A country's total GDP divided by its population; for example, if the Czech Republic has a GDP of $2,000$ billion koruny, a population of $20$ million, and an exchange rate of $20$ koruny per U.S. dollar, the per capita GDP is $\$5000$.

Productivity Growth Rate

A metric closely linked to the growth rate of GDP per capita, although the two are not identical.

Growth Accounting Studies

Studies performed since the late 1950s that have determined technology is typically the most important contributor to U.S. economic growth.

Economic Growth Factors

Factors including an increase in the proportion of the population that is college educated and increased labor productivity stimulated by literacy.

Out of the Labor Force

A classification for individuals such as university students enrolled full-time and not seeking employment.

Adverse Selection of Wage Cuts

An argument that if an employer reduces pay for all workers during poor conditions, the best workers with better alternatives are most likely to leave.

Cyclical Unemployment

Being out of work due to the temporarily low demand for products associated with a recession.

Frictional Unemployment

Unemployment that occurs when a worker decides to quit one job to seek a different job.

Unemployment Rate

The number of unemployed workers as a percentage of the labor force.

Labor Force Participation Rate

The percentage of the working-age population that is either employed or unemployed (seeking work).

Employment Insurance Compensation

A benefit that typically equates to roughly one-third of one's latest salary for up to $26$ weeks; it can encourage longer job searches leading to better job-employee matches.

Inflation

A pressure for price increases that reaches across most markets, not just one, affecting goods, services, wages, and income levels.

Substitution Bias

The reason a rise in the price of a fixed basket of goods over time tends to overstate the rise in a consumer’s true cost of living.

Hyperinflation

Extremely high inflation rates, such as the $2500\%$ rates seen in Russia during the early 1990s.

GDP Deflator

A price index that includes components of GDP: Consumption, Investment, Government, plus Exports minus Imports.

Neoclassical Economists

Economists who generally emphasize the importance of aggregate supply in determining the size of the macroeconomy over the long run.

Aggregate Supply (AS)

The relationship between the total quantity that firms choose to produce and sell and the price level for output, holding the price of inputs fixed.

Say’s Law

The argument that a given value of supply must create an equivalent value of demand somewhere else in the economy.

Keynes' Law

An economic principle that typically applies during economic contractions, while Say's law applies during economic expansion.

Aggregate Demand (AD) Factors

Increases in exports act as an addition to AD, while increases in imports act as a subtraction from AD.

Soft Peg Exchange Rate

A policy in which the government almost never acts to intervene in the exchange rate market, functioning similarly to a floating exchange rate.

M2 Money Supply

A category of the money supply that includes money market funds.

Open Market Operations

A traditional tool where the Central Bank buys or sells bonds to increase or decrease the quantity of money; buying bonds increases the money supply.

Estate and Gift Tax

A tax levied on people who pass assets to the next generation, either after death or during life.

Progressive Tax

A tax policy where higher income earners pay a higher dollar amount, and potentially a higher rate, than lower income earners.

Absolute Advantage

When a nation can produce more of a specific good than another nation (e.g., Alland producing $32$ units of food while Georgeland produces $24$).

Comparative Advantage

The ability of a nation to produce a good at a lower opportunity cost than another nation; a nation cannot have this in the production of every good.

Tariffs

Trade restrictions that increase the domestic scarcity of foreign products, benefiting domestic producers while harming domestic consumers by increasing prices and decreasing quantity consumed.