macro unit 3

Labor Force (LF)

The sum of employed (E) and unemployed (U) individuals in an economy.

Unemployment Rate

The percentage of unemployed individuals in the labor force, calculated as U/LF.

Frictional Unemployment

Short-term unemployment due to skill-matching issues or transitions between jobs.

Structural Unemployment

Long-term unemployment resulting from a mismatch between labor skills and job demands.

Cyclical Unemployment

Unemployment caused by economic downturns, leading to production cuts and layoffs.

Efficiency Wage Theory

Theory proposing that higher wages can enhance worker productivity and reduce turnover.

Minimum Wage Laws

Legislation establishing a wage floor to prevent exploitation of low-wage workers.

Sticky Wages

Wages that are resistant to change due to social contracts, leading to potential unemployment.

Phillips Curve

Illustrates the inverse relationship between inflation and unemployment rates in an economy.

Future Value (FV)

The value of an investment at a specific date in the future, calculated based on a specified rate of return.

Compound Interest

Interest calculated on the initial principal and also on the accumulated interest from previous periods.

Profit Margin

The ratio of profit to revenue, indicating the percentage of revenue that represents profit.

profit/revenue  = (total revenue - total cost)/revenue

Markup

The amount added to the cost price of goods to cover overhead and profit.

= profit/cost

Stabilization Policy

Monetary and fiscal policies aimed at reducing fluctuations in output, employment, and prices.

Recognition Lag

The time taken for policymakers to identify the existence of an economic boom or recession.

Implementation Lag

The delay between recognizing the need for a policy change and its actual implementation.

Monetary  Policy implemented quicker

Labor Productivity

The amount of output produced per unit of labor input.

Catch-Up Growth

The theory that less developed countries can grow at a faster rate than developed countries to reduce income gaps.

Increase in quality of labor supply (human capital)

Refers to the enhancement of the skills and knowledge of the workforce, leading to increased labor productivity.

Trade surplus

Situation where a country exports more goods and services than it imports.

Trade deficit

Situation where a country imports more goods and services than it exports.

Comparative advantage

Theory stating that specialization and free trade benefit all trading partners, focusing on producing goods with lower opportunity costs.

Absolute advantage

The ability of a party to produce more output using fewer resources or produce the same output using fewer resources compared to another party.

Exchange rate

The price of one currency in terms of another, influencing international trade and financial transactions.

Fluctuations in the value of currencies that impact international trade.

Current account surplus

The difference between a country's exports and imports, resulting in a positive balance.

Open economy

An economy that includes exports and imports in the Aggregate Expenditure (AE) equation.

Marginal propensity to import (MPM)

The change in imports caused by a $1 change in income.

Open economy multiplier

The multiplier in an open economy, calculated as 1/(1 - (MPC - MPM)).

Equilibrium exchange rate

The point where the quantity demanded of a foreign currency equals the quantity supplied.

Purchasing power parity

The theory that exchange rates between two currencies will adjust to equalize the purchasing power of both currencies.

Floating exchange rate

An exchange rate determined by market forces without government intervention.

System where currency values are determined by the market forces of supply and demand.

Depreciation

When a currency loses value relative to others, making goods from that country cheaper for foreign buyers.

Appreciation

When a currency gains value relative to others, making goods from that country more expensive for foreign buyers.

Law of One Price

Idea that identical goods should have the same price in different markets when exchange rates are considered.

Monetary Policy

Actions by a central bank that can influence the value of a currency.

Fiscal Policy

Government decisions on spending and taxation that can impact the economy.

J-Curve

Concept showing the short-term worsening of a country's trade balance after a currency depreciation.

GDP

Gross Domestic Product, the total value of goods and services produced in a country.

Disposable Income

Personal income minus taxes, representing the money available for spending and saving.

Unemployment Rate

Percentage of the labor force that is unemployed.

Nominal vs real

Nominal is the stated rate, while real adjusts for inflation.

Tools of Fiscal & Monetary Policy

Instruments used by governments and central banks to influence the economy.

response

The_____ lag is shorter for fiscal policy than it is for monetary policy

bond

a document that formally promises to pay back a loan under specified​ terms, usually over a specific time period.

The Dow Jones Industrial Average

an index based on the stock prices of 30 actively traded large companies. It is the oldest and most widely followed index of stock market performance

The NASDAQ Composite

an index based on the stock prices of over​ 5,000 companies traded on the NASDAQ Stock Market.

the​ S&P 500​ index

An index based on the stock prices of 500 of the largest firms by market value.

​cut; raised

Deficit targeting requires government spending to be​ ________ and taxes to be​ ________ during an economic contraction.

​Heckscher-Ohlin theorem

The existence of trade for country where capital is relatively abundant specializing in capital intensive goods might best be explained by

dumping

When a firm or industry sells products on the world market at prices below the cost of​ production, this known as

a tariff

When governments imposes a tax on​ imports

a quota

• Max limit on number of items that can be imported into the country 

• Same result as tarfits → raise price of product

an export subsidy

When a government makes a payment to domestic firms to encourage​ exports, this is known as

Social, or Implicit, Contracts

Unspoken agreements between workers and firms thatfirms will not cut wages

response lag

• Time takes for economy to adjust to the new conditions after a new policy implemented 

• Lag occurs bc of operation of economy itself

• response quicker with fiscal policy

Substitution effect

A rise in the interest rate leads you to consume less today and save more.

Income (interest) effect

- If a household has positive wealth and is earning interest on that wealth, a rise in the
interest rate leads to a rise in interest income.
– Which will lead to more consumption

Factors that affect household consumption & labor supply decisions

• Current and expected future real wage rates

• Initial value of wealth

• Current and expected future non-labor income

• Interest rates

• Current and expected future tax rates and transfer payments

vertical integration

• Dicing up production process into stages → 1 stage abroad & rest is in original country 

  • Due to production costs 

    • Ex: apple has apple build monitors and then ship to USA

Greenfield investment

building entire factory from ground up

brownfield investment

• Acquiring business assets of an existing firm in another country 

  • Usually invest shares in company

horizontal integration

Replicating entire production process abroad → bc of transportation cost (also shipping cost)