EXAM 2 ECONOMIC

COASE THEOREM

If, at no cost, people can negotiate the purchase and sale of the right to perform activities that cause externalities, they can always arrive at efficient solutions to the problems caused by externalities.

EXTERNAL BENEFIT (OR POSITIVE EXTERNALITY)

A benefit of an activity received by people other than those who pursue the activity.

EXTERNAL COST (OR NEGATIVE EXTERNALITY)

A cost of an activity that falls on people other than those who pursue the activity.

EXTERNALITY

An external cost or benefit of an activity.

POSITIONAL ARMS CONTROL AGREEMENT

An agreement in which contestants attempt to limit mutually offsetting investments in performance enhancement.

POSITIONAL ARMS RACE

A series of mutually offsetting investments in performance enhancement that is stimulated by a positional externality.

POSITIONAL EXTERNALITY

This occurs when an increase in one person’s performance reduces the expected reward of another’s in situations in which reward depends on relative performance.

TRAGEDY OF THE COMMONS

The tendency for a resource that has no price to be used until its marginal benefit falls to zero.

ADVERSE SELECTION

The pattern in which insurance tends to be purchased disproportionately by those who are most costly for companies to insure.

EARNED-INCOME TAX CREDIT (EITC)

A policy under which low-income workers receive credits on their federal income tax.

FIRST-DOLLAR INSURANCE COVERAGE

Insurance that pays all expenses generated by the insured activity.

HEALTH MAINTENANCE ORGANIZATION (HMO)

A group of physicians that provides health services to individuals and families for a fixed annual fee.

IN-KIND TRANSFER

A payment made not in the form of cash, but in the form of a good or service.

MEANS-TESTED

A benefit program whose benefit level declines as the recipient earns additional income.

NEGATIVE INCOME TAX (NIT)

A system under which the government would grant every citizen a cash payment each year, financed by an additional tax on earned income.

PERSONAL RESPONSIBILITY AND WORK OPPORTUNITY RECONCILIATION ACT

The 1996 federal law that transferred responsibility for welfare programs from the federal level to the state level and placed a five-year lifetime limit on payment of AFDC benefits to any given recipient.

POVERTY THRESHOLD

The level of income below which the federal government classifies a family as poor.

ABSOLUTE ADVANTAGE

One person has an absolute advantage over another if he or she takes fewer hours to perform a task than the other person.

CLOSED ECONOMY

An economy that does not trade with the rest of the world.

COMPARATIVE ADVANTAGE

One person has a comparative advantage over another if his or her opportunity cost of performing a task is lower than the other person’s opportunity cost.

OPEN ECONOMY

An economy that trades with other countries.

PROTECTIONISM

The view that free trade is injurious and should be restricted.

QUOTA

A legal limit on the quantity of a good that may be imported.

TARIFF

A tax imposed on an imported good.

WORLD PRICE

The price at which a good or service is traded on international markets.

AGGREGATION

The adding up of individual economic variables to obtain economywide totals.

AVERAGE LABOR PRODUCTIVITY

Output per employed worker.

FISCAL POLICY

Decisions that determine the government’s budget, including the amount and composition of government expenditures and government revenues.

MACROECONOMIC POLICIES

Government actions designed to affect the performance of the economy as a whole.

MONETARY POLICY

Determination of the nation’s money supply.

NORMATIVE ANALYSIS

Addresses the question of whether a policy should be used; normative analysis inevitably involves the values of the person doing the analysis.

POSITIVE ANALYSIS

Addresses the economic consequences of a particular event or policy, not whether those consequences are desirable.

STANDARD OF LIVING

The degree to which people have access to goods and services that make their lives easier, healthier, safer, and more enjoyable.

STRUCTURAL POLICY

Government policies aimed at changing the underlying structure, or institutions, of the nation’s economy.

CAPITAL GOOD

A long-lived good that is used in the production of other goods and services.

CONSUMER PRICE INDEX (CPI)

A measure of the cost in that period of a standard basket of goods and services relative to the cost of the same basket in a fixed year, called the base year.

CONSUMPTION EXPENDITURE (OR CONSUMPTION)

Spending by households on goods and services such as food, clothing, and entertainment.

DEFLATING (A NOMINAL QUANTITY)

The process of dividing a nominal quantity by a price index (such as the CPI) to express the quantity in real terms.

DEFLATION

A situation in which the prices of most goods and services are falling over time so that inflation is negative.

DISCOURAGED WORKERS

People who say they would like to have a job but have not made an effort to find one in the past four weeks.

DURATION

The length of an unemployment spell.

FINAL GOODS OR SERVICES

Goods or services consumed by the ultimate user; counted as part of GDP.

GOVERNMENT PURCHASES

Purchases by federal, state, and local governments of final goods and services.

GROSS DOMESTIC PRODUCT (GDP)

The market value of the final goods and services produced in a country during a given period.

INDEXING

The practice of increasing a nominal quantity each period by an amount equal to the percentage increase in a specified price index.

INTERMEDIATE GOODS OR SERVICES

Goods or services used up in the production of final goods and services and therefore not counted as part of GDP.

INVESTMENT

Spending by firms on final goods and services, primarily capital goods.

INVOLUNTARY PART-TIME WORKERS

People who say they would like to work full-time but are able to find only part-time work.

LABOR FORCE

The total number of employed and unemployed people in the economy.

MARKET VALUE

The selling prices of goods and services in the open market.

NET EXPORTS

The value of a country’s exports less the value of its imports in a particular period.

NOMINAL GDP

A measure of GDP in which the quantities produced are valued at current-year prices.

NOMINAL QUANTITY

A quantity that is measured in terms of its current dollar value.

PARTICIPATION RATE

The percentage of the working-age population in the labor force.

PRICE INDEX

A measure of the average price of a given class of goods or services relative to the price of the same goods or services in a base year.

PRICE LEVEL

A measure of the overall level of prices at a particular point in time.

RATE OF INFLATION

The annual percentage rate of change in the price level.

REAL GDP

A measure of GDP in which the quantities are valued at the prices in a base year.

REAL QUANTITY

A quantity that is measured in physical terms.

REAL WAGE

The wage paid to workers measured in terms of purchasing power.

RELATIVE PRICE

The price of a specific good or service in comparison to the prices of other goods and services.

UNEMPLOYMENT RATE

The number of unemployed people divided by the labor force.

UNEMPLOYMENT SPELL

A period during which an individual is continuously unemployed.

VALUE ADDED

The market value of a firm's product or service minus the cost of inputs purchased from other firms.