Exam 3 (Chapters 6,7, and 11) - Contemporary Economic Issues

macroeconomics

the branch of economics which studies the functioning and performance of a society’s economy as a whole, with focus on levels of and changes in aggregate measures such as unemployment rate, inflation rate, and GDP

gross domestic product (GDP)

the total market value of final goods and services produced within an economy in a given year

what is comprised of GDP (production)?

consumption expenditures, private investment expenditures, government procedures, and net exports

consumption expenditures

purchases of newly produced goods and services by households

private investment expenditures

purchases of newly produced goods and services by firms (spending on new plants and equipment)

government purchases

purchases of newly produced goods and services by local, state, or federal government

net exports

exports minus imports

export

a good or service produced in the home country and sold in a foreign country

import

a good or service produced in a foreign country and purchased by someone in the home country

trade deficit

the excess of imports over exports

trade surplus

the excess of exports over imports

used goods

a good that was already counted when they were produced

non-market production

making goods and services that are not sold through a market and are therefore difficult to measure

underground economy (black market)

goods and services are bought and sold without reporting the sale to the authorities

real GDP

a measure of GDP that controls for changes in prices

nominal GDP

the value of GDP at current prices

GDP per capita formula

GDP/population

GDP per capita

the average per-person output of the economy in the prices of the current year

industrially allowed countries (IAC’s)

the high income countries with primarily market based economies, large stocks of technologically advanced industrial capital, and a highly educated and skilled workforce

less developed countries (LDC’s)

lower income countries which are held back by some combination of poor economic institutions, underdeveloped industrial capital, and/or and unskilled or uneducated worker

purchasing power parity (PPP)

takes the effects of “differences in costs of living” out of GDP figures across countries. is used to compare GDP across countries

business cycle

the periodic but irregular fluctuation in overall macroeconomic activity which occurs over time, measured by changes in “real GDP"

what is business cycle also known as?

boom-bust cycle

what are the 4 phases of the business cycle?

expansion, peak, recession, trough

expansion

a period of time during which an economy is growing or recovering

peak

the point in time at which an economy stops growing at the end of an expansion

recession

a period of time during which an economy is contracting, commonly defined as six or ore consecutive months of declining real GDP

trough

the point in time at which and economy stops contracting at the end of a recession

social overhead capital

basic infrastructure projects such as roads, power generation, and irrigation systems.

how can technological improvement take place?

invention and innovation

invention

an advance in knowledge

innovation

the application of new knowledge to produce a new productor to produce an existing product more efficiently

catch-up effect

the theory stating that (all other factors fixed) the growth rates of less developed countries will exceed the growth rates of developed countries, allowing the less developed countries to “catch up”

vicious cycle of poverty hypothesis

poverty is self-perpetuating because poor nations are unable to save and invest enough to accumulate the capital stock that would help them grow

capital flight

the tendency for both human capital and financial capital to leave developing countries in search of higher expected rates of return elsewhere with less risk

brain drain

tendency for talented people from developing countries to become educated in a developed country and stay there after graduation

rule-of-law

environment where property rights and contracts are respected and administered fairly and transparently without favoritism

crony capitalism

environment in which well-connected business people use corrupt political systems to their advantage in order to obtain preferential treatment from government

inflation

a general increase in prices and fall in the purchasing value of money

inflation rate

the rate at which the overall price level increases on an annual basis. calculated using the CPI.

deflation

a general decrease in the level of overall prices (i.e., a realization of a negative inflation rate

hyperinflation

an extremely high rate of inflation, generally above 100% per year

money supply (m)

the amount of money in an economy (denoted)

equation of exchange

an identity which related the money supply, velocity of money, overall price level, and aggregate level of output to each other

equation of exchange formula

MV = PQ

velocity of money (v)

the number of times that a typical dollar is used in market transactions in a single year

overall price level (p)

the “average” of all prices of goods/services traded

aggregate level of output (q)

a measure of the real quantity of goods/services produced

how does the central bank alter the money suppy?

through conducting open market operations, fractional reserve banking system, and setting of discount rate.

open market operations

the buying and selling of U.S. Treasury debt on open markets like Wall Street

fractional reserve banking system

a system in which at any point in time a commercial bank is only required to retain a portion of the money it has accepted as deposits

setting of discount rate

setting the interest rate that the Feds charge banks on short-term loans

loanable funds market

the collection of all markets in which lenders and borrowers interact (for ex: mortgage markets, auto loan markets, consumer credit markets, business loan markets, etc).

expansionary monetary policy

an increase in the money supply which provides a short term stimulus to the macroeconomy, resulting in higher levels of output employment, and incomes

contractionary monetary policy

a decrease in the money supply which dampens overall economic activity, resulting in lower levels of output, employment, and incomes in the short term (but greater stability in the long term)

gold standard

a monetary system where the country fixed the value of its currency in terms of a specific amount of gold

price control

a legal restriction on the price at which trade can take place (i.e., price ceilings and floors)

price ceiling

a maximum legal price at which trade can take place

price floor

a minimum legal price at which trade can take place