International Economics - Unit 4, Macroeconomics (Pre-IB Economics)

Absolute Advantage

A country that can produce more of a good than another country given the same resources

Comparative Advantage

When one individual, firm, or country has the lowest opportunity cost for producing a good or service

Balance of Trade

The value of all goods and services exported from a country minus the value of all goods and services imported from outside the country

Trade Surplus

When exports exceed imports

Trade Deficit

When imports exceed exports

Free Trade Agreements (Trading Bloc)

The result of two or more countries agreeing to lower trade barriers to promote trade

NAFTA (North American Free Trade Agreement)

A free trade agreement that aims to eliminate trade barriers between Canada, America, and Mexico

EU (European Union)

A free trade agreement created after WWII to unite European countries economically

ASEAN (Association of Southeast Asian Nations)

A free trade agreement intended to link impoverished nations of southeast Asia

Tariff

A tax paid on imports

Quota

A limit on the amount of a product that can be brought into a country legally

Embargo

The elimination of trade with people and businesses in a country

Subsidy

Policy of reducing cost for producers- often to promote exports

Arguments for Free Trade

-Increases competition, which reduces costs for buyers and improves quality of goods

-Allows for domestic goods to be sold all over the world and protects export industries

-Allows the country to exercise comparative advantage through specialization

Arguments Against Free Trade

-New industries are protected by trade barriers

-Free trade hurts domestic workers because companies move oversees to utilize cheaper labor and increase profits

-Labor standards are not the same all over the world

Exchange Rate

The price of one nation's currency in terms of another nation's currency

Appreciation

When the value of currency strengthens

Depreciation

When the value of currency weakens

Protectionism

The economic policy of restraining trade between states through methods such as tariffs on imported goods, restrictive quotas, and a variety of other government regulations in order to protect the nation's industries

Balance of Payments

The record of all economic transactions between the residents of the country and the rest of the world in a particular period

Interdependence

When countries trade with each other in order to get the goods and services they need

Capital Account

national account that records transactions involving the purchase and sale of financial assets.

Current Account

The part of balance of payments that includes goods and services

Standard

Barrier to trade that requires imports to meet a certain level of quality for consumer safety or other reasons.

World Trade Organization

Administers the rules governing trade between its 144 members. Helps producers, importers, and exporters conduct their business and ensure that trade flows smoothly.

USMCA (United States-Mexico-Canada Agreement)

This is a regional trade agreement between the United States, Canada, and Mexico that is designed to replace NAFTA. The agreement has been signed by the leaders of all three countries, but at the time of publication has not yet been ratified by the legislatures of those countries.

Macroeconomics

The study of economics that has to do with national or international affairs

Gross Domestic Product (GDP)

A dollar amount measurement of things produced within a country's boarders during a specific time period

Formula for GDP

C + I + G + NX

(Consumption + Investment + Government Purchases + Net Exports)

Net Exports

Exports minus imports

Real GDP

GDP that has been adjusted for inflation

Nominal GDP

GDP that has not been adjusted for inflation

CPI (Consumer Price Index)

An economic index that takes a standard base year and measures average price changes compared to the base year; this calculation determines how much more or less consumers are paying year-to-year

Aggregate Supply

the total amount of goods and services in the economy available at all possible price levels

3 Macroeconomic Indicators

GDP, unemployment rate, and price level

3 Macroeconomic Goals

Promote economic growth, stabilize prices, and promote full employment

Expansion

A phase of the business cycle in which real GDP, income, and employment rise.

Contraction

a period of economic decline marked by falling real GDP, falling CPI, and increasing unemployment

Depression

A trough that is sustained for an extended period of time

Deflation

A general decrease in prices

Inflation

A steady rise in prices; currency is largely available during this time

Stagflation

When there is low economic growth along with inflation

Per Capita GDP

A nation's GDP divided by the total population of that country; this is a slightly more accurate way to measure standard of living in a country

National Debt

The amount of money a government owes

Budget Deficit

When federal spending exceeds federal revenue in a given year

Trade Deficit

A foreign trade imbalance in which the value of a nation's imports exceeds the value of its exports

Trade Surplus

When the value of a nation's exports exceeds that of its imports

Aggregate Demand

the amount of goods and services in the economy that will be purchased at all possible price levels

Cyclical Unemployment

Unemployment that occurs because of a contracting economy; it rises in economic downturns and falls when the economy improves

Frictional Unemployment

Unemployment that occurs when people are in between jobs and waiting for the right job opportunity to come along; is due to people changing jobs, taking time to find unemployment after finishing their schooling, or a variety of other reasons

Seasonal Unemployment

Unemployment that is caused by industries slowing or shutting down for a season and no longer needing as many workers

Unemployment

People 16 and older who have looked for work in the past 30 days

Labor/Work Force

People with jobs or those who are actively looking for jobs

Discouraged Workers

People who want jobs but are no longer looking; not counted in unemployment rate

Unemployment Rate

The number of people who are unemployed divided by the total number of people in a labor force

Underemployment

When people have skills that are above the level of their current job

Demand-Pull Inflation

When prices are pulled up by demand

Cost-Push Inflation

When prices are pushed up by high production costs

Market Basket

The group of products accounted for by the CPI; includes food, shelter, utilities, transportation, health care, entertainment, etc.

Consumption

The purchasing by households of durable (TV, cars, furniture) and non-durable (cereal, soap, paper) goods

Investment

The buying of goods by firms in order to better their businesses

Government Spending

spending by all levels of government on final goods and services

Business Cycle

The time vs. GDP graph that shows how GDP has changed over time

Hyperinflation

A rapid increase in the general price level of all goods and services

Fiscal Policy

The use of government revenue collection and expenditure to influence the economy

2 Tools of Fiscal Policy

Taxing and government spending

Expansionary Policy (Fiscal)

When taxes go down and government spending goes up; is used during a contraction phase to put more money into the economy; used to promote economic growth and reduce unemployment

Contractionary Policy (Fiscal)

When taxes go up and government spending goes down; is used during an expansion phase; used to curb inflation and stabilize prices

John Maynard Keynes

The British economist credited with creating the basis of fiscal policy

Federal Reserve (The Fed)

The central bank of the United States

Money

Anything that is generally accepted as a final payment for goods and services

Monetary Policy

The actions taken by the Federal Reserve to promote economic growth, stabilize inflation, and minimize unemployment

Expansionary Policy (Monetary)

Actions taken by the Fed when GDP is declining and unemployment is on the rise; happens during the contraction phase

Contractionary Policy (Monetary)

Actions taken by the Fed when inflation grows too quickly; happens during the expansion phase

3 Tools of Monetary Policy

Open market operations, reserve requirements, interest rates

FOMC (Federal Open Market Committee)

The branch of the Fed that controls all open market operations and sells bonds; made up of the Board of Governors plus the five district bank presidents

District Banks

A subdivision of the Fed made up of 12 regional banks that monitor the economic conditions in their district

Board of Governors

The group made up of seven members that oversees the actions of the Fed; chairperson: Janet Yellen (soon to be Jerome Powell)

Bond (aka Securities)

Government-issued promise to repay borrowed money; if the Fed sells these, money supply declines (expansion phase); if the Fed buys these, money supply increases (contraction phase)

Reserve Requirements (aka Reserve Ratios)

The minimum amount of money reserve banks must not loan out; requirement high during expansion phase and low during contraction phase

Interest Rates

The Fed will raise or lower this to affect money supply; there is a high rate of this during the expansion phase and a low rate during the contraction phase; types include discount rate and fed funds rate

Monetary Hawk

A term used to describe someone who places keeping inflation low as their top priority in monetary policy; favor "tight" monetary policy

Monetary Dove

Someone who emphasizes other issues (like low unemployment) over low inflation; generally more in favor of expansionary monetary policy

Tight Monetary Policy

A monetary policy that allows less money in circulation, which encourages saving and discourages loans by forcing interest rates to rise

Loose Monetary Policy

A monetary policy that puts more money in circulation, which encourages spending in order to grow the economy and promote employment

Discount Rate

An interest rate applied when the Fed loans money to member banks

Federal Funds Rate

An interest rate that is applied when banks loan money to each other, usually in order to reach reserve requirements

Aggregate

Total

Domestic

Existing or occurring inside a particular country

interest on reserves

The central bank's policy of paying banks an interest rate for the deposits that they hold as reserves.

demand shock

an event that affects the demand for goods and services in the economy

supply shock

An unexpected event that causes the short-run aggregate supply curve to shift

Short Run Aggregate Supply

The relationship between the quantity of real GDP supplied and the price level when the money wage rate, the prices of other resources, and potential GDP remain constant.

long-run aggregate supply curve

shows the relationship between the aggregate price level and the quantity of aggregate output supplied that would exist if all prices, including nominal wages, were fully flexible

recessionary gap

when aggregate output is below potential output

inflationary gap

when aggregate output is above potential output

peak

the height of an economic expansion, when real GDP stops rising

Trough

the lowest point in an economic contraction, when real GDP stops falling