Macroeconomics Unit 1 Vocabulary

Gross Domestic Product (GDP)

The total income earned domestically, including the income earned by foreign-owned factors of production; the total expenditure on domestically produced goods and services

Inflation rate

The rate at which prices are rising

Unemployment rate

The percentage of those in the labor force who do not have jobs

Recession

A sustained period of falling real income

Depression

A very severe recession

Deflation

A decrease in the overall level of prices

Model

A simplified representation of reality, often using diagrams or equations, that shows how variables interact

Endogenous variable

A variable that is explained by a particular model; a variable whose value is determined by the model’s solution

Exogenous variable

A variable that a particular model takes as given; a variable whose value is independent of the model’s solution

Supply and Demand equation

Q^d = D(P,Y)

Where Q^d is demand, P is price, Y income, and D() expresses how the variables in parentheses determine the quantity of pizza demanded

Market-Clearing model

A model that assumes that prices freely adjust to equilibrate supply and demand

Microeconomics

Study of how households and firms make decisions and how these decisionmakers interact in the marketplace

Utility

Level of satisfaction

What makes up GDP?

• Administrative data (tax collection, education, defense, etc.)

• Statistical data (Surveys of retail, manufacturing, farms, etc.)

What is the purpose of GDP?

To summarize all the data into a single number to represent economic activity in a given period of time

National income accounting

The accounting system that measures GDP and many other related statistics

Stock

A variable measured as a quantity at a point in time

Flow

A variable measured as a quantity per unit of time

Value added

The value of a firm’s output minus the value of the intermediate goods the firm purchased

Imputed value

An estimate of the value of a good or service that is not sold in the marketplace and therefore does not have a market price

Housing in GDP

• Renting is buying house services and providing income for the landlord, making the rent part of GDP

• For owning homes, GDP includes the “rent” these homeowners “pay” to themselves for enjoying housing services

Nominal GDP

Value of goods and services measured at current prices

Real GDP

Value of goods and services using a constant set of prices

GDP Deflator

A measure of the overall level of prices that shows the cost of the currently produced basket of goods relative to the cost of the basket in a base year

National income accounts identity

The equation showing that GDP is the sum of consumption, investment, government purchases, and net exports

Consumption

Household expenditures on goods and services

Investment

Items bought for future use

3 Types of investment

• Business fixed

• Residential fixed

• Inventory

Government pruchases

Goods and services bought by federal, state, and local governments

Net exports

Exports - Imports

Consumer price index (CPI)

A measure of the overall level of prices that shows the cost of a fixed basket of consumer goods relative to the cost of the same basket in a base year

GDP Deflator vs CPI (3 differences)

• Deflator measures the prices of all goods and services produced, whereas the CPI measures the prices of only the goods and services bought by consumers

• Deflator only includes goods produced domestically

• CPI assigns fixed weights while deflator is flexible

PCE deflator

Ratio of nominal personal consumption expenditure to real personal consumption expenditure; a measure of the overall level of prices that shows the cost of the currently consumer basked of goods relative to the cost of that basket in a base year

Issues with CPI

• Because price is fixed, it does not reflect the ability of consumers to substitute goods (substitution bias)

• Increase in purchasing power from the introduction of a new good is not reflected

• Changes in quality are unmeasured

Labor force

Number of people employed and unemployed

Unemployment rate

Percentage of the labor force that is unemployed

Labor-force participation rate

Percentage of the adult population that is in the labor force

Factors of production

Inputs used to produce goods and services

Capital

Set of tools that workers use (ex. calculators or a construction crane)

Labor

Time people spend working

How do we differentiate between fixed and not fixed capital and labor?

Production function

Mathematical relationship showing how the quantities of the factors of production determine the quantity of goods and services produced

Constant returns to scale

A property of a production function whereby a proportionate increase in all factors of production leads to an increase in output of the same proportion

Factor price

The amount paid for one unit of a factor of production

Competition

A situation in which there are many individuals or firms, and the actions of any one of them do not influence market prices

Marginal product of labor (MPL)

Extra amount of output the firm gets from one extra unit of labor, holding the amount of capital fixed

Diminishing marginal product

The marginal product increases at a decreasing rate

Real wage 

The payment of labor measured in units of output

Marginal product of capital (MPK)

Amount of extra output the firm gets from an extra unit of capital, holding the amount of labor constant

Real rental price of capital

Rental price measured in units of goods rather than in dollars

Economic profit

The amount of revenue remaining for the owners of a firm after all the factors of production have been compensated

Accounting profit

The amount of revenue remaining for the owners of a firm after all the factors of production except capital have been compensated

Cobb-Douglas Production Functrion

A production function of the form F(K,L)=AK^α(L^1−α) where K is capital, L is labor, and A and α are parameters

Disposable income

Income remaining after the payment of taxes

Consumption function

Relationship between consumption and disposable income

Marginal propensity to consume

Amount by which consumption changes when disposable income increase by one dollar

Interest rate

The market price at which resources are transferred between the present and the future

Nominal interest rate

Rate of interest that investors pay to borrow money

Real interest rate

Nominal interest rate corrected for the effects of inflation

National Savings

A nation’s income minus consumption and government purchases; the sum of private savings and public savings

Private savings

Disposable income - consumption

Public saving

Government receipts minus government spending (Budget surplus)