Chapters 5-8 important terms

aggregate production function

the process whereby an economy as a whole turns economic input such as human/physical capital and technology into outut measured as GDP per capita

capital deepening

an increase by society in the average level of physical/human capital per person

compound growth rate

the rate of growth when multiplied by a base that includes past GDP growth

convergence

pattern in which economies with low per capital incomes grow faster than economies with high per capita incomes

human capital

accumulated skill, knowledge, and education of workers

infrastructure

a component of physical capital such as roads and railway systems

innovation

putting advances in knowledge to use in a new product/service

invention

advance in technology

labor/worker productivity

the value of what is produced per worker or per hour worked

modern economic growth

the period of rapid economic growth from 1870 onwards

physical capital

plant and equipment that firms use in production (includes infrastucture)

production function

process whereby a firm turns inputs into outputs

rule of law

laws that protect individual/entity right to use their property as they see fit (must be clear, public, fair and enforced)

Special Economic Zone (EZ)

area of a country that the government does not tax trade (usually area with port acess)

technological change

combination of invention and innovation

technology

all the ways in which existing inputs produce more/higher quality as well as different products

adverse selection of wage cuts argument

if an employer reduces wages for all workers, the best will leave

cyclical unemployment

unemployment closely tied to the business cycle

discouraged workers

those who have stopped looking for employment due to lack of suitable options available

efficiency wage theory

theory that the productivity of workers will increase if pay rises

frictional unemployment

unemployment that occurs as workers move between jobs

implicit contract

unwritten agreement in labor market that employer will try to keep wages from falling in weak economy and employees will not expect huge salary increase when economy is strong

insider-outsider model

already working for firm are “insiders” and recent/prospective hires are “outsiders”

labor force participation rate

percentage of adults in an economy either employed or unemployed and looking for a job

natural rate of unemployment

unemployment rate that would exist in a growing & healthy economy

out of the labor force

those not looking for work/not working - whether they want employment or not

relative wage coordination argument

across the board wage cuts are hard for the economy to implement and workers fight against them

structural unemployment

unemployment that occurs because individuals lack skills valued by employers

underemployment

individuals who are employed in a job below their skill level

unemployment rate

percentage of adults who are in the labor force but do not have jobs

adjustable rate mortgage (ARM)

a loan borrower uses to purchase a home in which the interest rate varies with market interest rates

basket of goods and services

a hypothetical group of different items - used as a basis for calculating how the prices level changes over time

consumer price index (CPI)

a measure of inflation that the U.S government calculates based on the price level from a fixed basket of goods/services that represents the average consumer’s purchase

Core Inflation Index

a measure of inflation typically calculated by taking the CPI & excluding volatile economic variables to help measure trends in long-term prices

cost-of-living adjustments (COLAs)

a contractual provision that wage increases will keep up with inflation

deflation

negative inflation: most prices in the economy are falling

Employment Cost Index

a measure of inflation based on wages paid in the labor market

GDP deflator

a measure of inflation based on the prices of all the GDP components

hyper inflation

outbursts of high inflation that often occur when economies shift from controlled to market

index number

a unit free number derived from the price level over the number of years - makes computing inflation easier

indexed

a price, wage, or interest rate adjusted automatically for inflation

inflation

a general and ongoing rise in price levels in an economy

International Price Index (IPI)

a measure of inflation based on the prices of merchandise that is exported/imported

Producer Price Index (PPI)

a measure of inflation based on prices paid for supplies and inputs by producers

quality/new good bias

inflation calculated using a fixed basket of goods over time tends to overstate the true rise in inflation because does not account for improvements in quality of goods/new goods

substitution bias

an inflation rate calculated using a fixed basket of goods over time tends to overstate the true rise of cost of living because it doesn’t take into account that the person can substitute away from goods whose pries rise considerably