Principles of Economics Flashcards

Vocabulary flashcards for economics exam review.

Microeconomics

The study of how individual households and firms make decisions and how they interact with one another in markets.

Macroeconomics

The study of the economy as a whole. Its goal is to explain the economic changes that affect many households, firms, and markets at once.

Gross Domestic Product (GDP)

A measure of the income and expenditures of an economy.

Definition of GDP

The total market value of all final goods and services produced within a given geographical area in a given period of time.

Gross National Product (GNP)

The total income earned by a nation's permanent residents, including income earned abroad and excluding income earned by foreigners.

Net National Product (NNP)

The total income of the nation’s residents (GNP) minus losses from depreciation.

National Income

The total income earned by a nation’s residents in the production of goods and services. It differs from NNP by excluding indirect business taxes and including business subsidies.

Personal Income

The income that households and noncorporate businesses receive. It excludes retained earnings but includes household’s interest income and government transfers.

Disposable Personal Income

The income left by households and noncorporate businesses after satisfying their government obligations, It equals personal income minus personal taxes and certain nontax payments.

Consumption (C)

The spending by households on goods and services, with the exception of purchases of new housing.

Investment (I)

The spending on capital equipment, inventories, and structures, including new housing.

Government Purchases (G)

The spending on goods and services by local, state, and federal governments. Does not include transfer payments.

Net Exports (NX)

Exports minus imports.

Nominal GDP

Valuing the production of goods and services at current prices.

Real GDP

Values the production of goods and services at base period (aka constant prices ).

GDP Deflator

Measures the current level of prices relative to the level of prices in the base year.

Real GDP of a nation

Value of total production in a given period using prices of a reference year.

Per-capita Real GDP

Value of real GDP per person.

Productivity

Quantity of goods and services produced from each unit of input.

Physical Capital

Stock of equipment and structures.

Human Capital

Knowledge and skills that workers acquire through education, training, and experience.

Natural resources

Nature, such as land, rivers, and mineral deposits.

Technological knowledge

Knowing the best ways to produce, Innovations or Steve Jobs’ “think different

Inflation

Increase in the price level of an economy, expressed as a rate of change of an index in a considered period.

Consumer Price Index (CPI)

Indicator to measure the changes in the general level of consumer prices

Nominal interest rate

Interest rate as usually reported without a correction for the effects of inflation

Real interest rate

Interest rate corrected for the effects of inflation.

Investment

The purchase of new capital

National saving (saving), S

Total income in the economy that remains after paying for consumption and government purchases.

Budget surplus

Excess of tax revenue over government spending.

Budget deficit

Shortfall of tax revenue from government spending.

Financial System

The group of institutions that helps match the saving of one person with the investment of another.

Financial markets

Institutions through which savers can directly provide funds to borrowers. Examples: The Bond Market and The Stock Market.

Financial intermediaries

Institutions through which savers can indirectly provide funds to borrowers. Examples: Banks and Mutual funds

Money

Is the set of assets in an economy that people regularly use to buy goods and services from other people.

Medium of exchange

Is an item that buyers give to sellers when they want to purchase goods and services. Is anything that is readily acceptable as payment.

Unit of account

Is the yardstick people use to post prices and record debts.

Store of value

Is an item that people can use to transfer purchasing power from the present to the future

Liquidity

Is the ease with which an asset can be converted into the economy’s medium of exchange.

Commodity money

Takes the form of a commodity with intrinsic value. Examples: Gold, silver, cigarettes.

Fiat money

Is used as money because of government decree and does not have intrinsic value. Examples: Coins, currency, check deposits

Currency

Is the paper bills and coins in the hands of the public.

Demand deposits

Are balances in bank accounts that depositors can access on demand by writing a check.

Fractional-reserve banking system

Banks hold a fraction of the money deposited as reserves and lend out the rest.

Reserve ratio

Is the fraction of deposits that banks hold as reserves.

Money multiplier

Is the amount of money the banking system generates with each dollar of reserves.

Monetary policy

Is the setting of the money supply by policymakers in the central bank.

Open-Market Operations

Buying and Selling of government bonds: When the CB buys government bonds, the money supply increases and the money supply decreases when the CB sells government bonds.

Reserve Requirements

Are regulations on the minimum amount of reserves that banks must hold against deposits. The reserve requirement is the amount (%) of a bank’s total reserves that may not be loaned out.

Discount Rate

Is the interest rate the CB charges banks for loans.