Macroeconomics Core Vocabulary (Lectures 0-5)

Vocabulary flashcards covering key macroeconomics terminology and formulas from Lectures 0 through 5.

Market

A group of buyers and sellers of a particular good or service.

Perfectly competitive market

A market where the goods are all exactly the same, there are so many buyers and sellers that no one can affect the price, and at the market price everyone can buy or sell all they want.

Price taker

A buyer or seller who must accept the market price because they are too small to change it.

Law of demand

Other things equal, when the price of a good rises, the quantity demanded falls, and when the price falls, the quantity demanded rises.

Ceteris paribus

"Other things being equal"; only one variable changes while everything else is held constant.

Normal good

A good people buy more of when their income rises.

Inferior good

A good people buy less of when their income rises.

Substitutes

Goods used in place of each other; a higher price of one raises demand for the other.

Complements

Goods used together; a lower price of one raises demand for the other.

Change in quantity demanded

A movement along the demand curve, caused only by a change in the good's own price.

Change in demand

A shift of the whole demand curve, caused by anything other than the good's own price.

Law of supply

Other things equal, when the price of a good rises, the quantity supplied rises, and when the price falls, the quantity supplied falls.

Equilibrium price

The market-clearing price at which quantity supplied equals quantity demanded.

Surplus

Excess supply that occurs when the price is above equilibrium, so quantity supplied is greater than quantity demanded.

Shortage

Excess demand that occurs when the price is below equilibrium, so quantity demanded is greater than quantity supplied.

Factors of production

The inputs used to produce goods and services: labor, capital and land.

Factor payments

What the owners of the factors of production earn: wages (labor), interest (capital) and rent (land).

Gross Domestic Product (GDP)

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

Intermediate goods

Goods used as inputs to make other goods, excluded from GDP to avoid double counting.

Value added

The value of a firm's output minus the cost of the inputs it bought from other firms.

Expenditure approach

Measuring GDP by adding up all spending on final goods: $Y = C + I + G + NX$.

Transfer payments

Government payments that are not in exchange for a good or service, such as Social Security and unemployment benefits; they are not part of GDP.

Net foreign factor income (NFFI)

Income foreigners earn inside the country minus income the country's citizens and companies earn abroad.

Nominal GDP

Output valued at current prices; not corrected for inflation.

Real GDP

Output valued at constant base-year prices; corrected for inflation, so it measures quantities only.

Growth rate

The percentage change in a variable from one period to the next: $\frac{\text{new} - \text{old}}{\text{old}} \times 100$.

GDP deflator

A measure of the price level of everything produced domestically: $\frac{\text{Nominal GDP}}{\text{Real GDP}} \times 100$.

Consumer Price Index (CPI)

A measure of the overall cost of a fixed basket of goods and services bought by a typical consumer, published by the Bureau of Labor Statistics.

Substitution bias

A CPI bias where the index overstates the rise in the cost of living because it ignores that people switch to goods that become relatively cheaper.

Core inflation

Inflation excluding food and energy prices.

Real interest rate

The interest rate corrected for inflation: $\text{nominal interest rate} - \text{inflation rate}$.

Productivity

The average quantity of goods and services produced per unit of labor input: $\frac{Y}{L}$.

Production function

An equation or graph showing the relationship between inputs and output: $Y = A \times F(L, K, H, N)$.

Catch-up effect

The tendency for countries that start poor to grow faster than countries that start rich.

Inward-oriented policies

Policies that protect domestic industries from foreign competition, such as tariffs and limits on foreign investment.

Outward-oriented policies

Policies that integrate a country with the world economy, such as removing trade and foreign investment restrictions.

Brain drain

The emigration of highly educated people from poor countries to rich countries.

Unemployment rate

The percentage of the labor force that is unemployed: $\frac{\text{unemployed}}{\text{labor force}} \times 100$.

Labor force participation (LFP) rate

The percentage of the adult population that is in the labor force: $\frac{\text{labor force}}{\text{adult population}} \times 100$.

Marginal product of labor (MPL)

The increase in total output from adding one more worker, holding other inputs constant.

Frictional unemployment

Unemployment that results from the time it takes workers to search for the jobs that best suit their tastes and skills.

Structural unemployment

Unemployment that results because the number of jobs is insufficient for everyone who wants one, caused by a wage held above equilibrium.

Efficiency wages

Above-equilibrium wages that firms choose to pay to increase worker productivity.

Natural rate of unemployment

The normal rate of unemployment around which the actual rate fluctuates; frictional plus structural unemployment.

Cyclical unemployment

The deviation of unemployment from its natural rate, caused by business cycle fluctuations.

Bond

A certificate of indebtedness; a loan from the buyer to the issuer.

Stock

A claim to partial ownership in a firm, and therefore to a share of its profits.

National saving (S)

The total income left after paying for consumption and government purchases: $S = Y - C - G$.

Private saving

The income households have left after paying taxes and consumption: $Y - T - C$.

Public saving

The tax revenue the government has left after paying for its spending: $T - G$.

Crowding out

A decrease in private investment that results from government borrowing.

Animal spirits

Keynes's term for business optimism or pessimism that drives investment decisions.