Econ 102 Summary

National product

The value of the total production of goods and services in a country.

National income

Total income generated from the production of output in a country, often measured by Gross Domestic Product (GDP).

Gross Domestic Product (GDP)

One of the most commonly used measures of national income, representing the total market value of all final goods and services produced in a country.

Potential output

The level of output produced when all factors of production are fully employed.

Output gap

The difference between actual output and potential output.

Unemployment rate

The percentage of the labor force that is not employed and actively searching for work.

Labour productivity

Measured as real GDP per employed worker or per hour of work, it is a key determinant of material living standards.

Price level

Measured by a price index, which reflects the cost of purchasing a set of goods in one year relative to a base year.

Inflation rate

Measures the rate of change of the price level over time.

Interest rate

The price paid to borrow money, expressed as a percentage of the amount borrowed.

Exchange rate

The number of units of one currency needed to purchase a single unit of another currency.

Economic waste

The negative consequence of unemployment, representing lost production and services.

Value added

A firm's contribution to total output, calculated as its output value minus the values of all intermediate goods used.

Circular flow of income

The model describing how money moves through the economy, linking production, income, and expenditure.

Consumption function

The relationship between disposable income and desired consumption.

Marginal propensity to consume (MPC)

The portion of additional income that is spent on consumption.

Marginal propensity to save (MPS)

The portion of additional income that is saved.

Equilibrium national income

The level of national income at which desired aggregate expenditure equals actual national income.

Autonomous expenditure

The component of total spending that is independent of income level, affecting desired consumption.

Simple multiplier

A calculated number indicating how much national income will change in response to a change in autonomous expenditure.

Budget balance

The difference between net tax revenues and government purchases.

Net taxes

Taxes minus transfer payments that influence aggregate expenditure.

Aggregate demand (AD) curve

A curve that shows the total quantity of goods and services demanded at various price levels.

Aggregate supply (AS) curve

A curve that shows the total quantity of goods and services supplied at various price levels.

Negative demand shock

A sudden decrease in demand leading to a recessionary gap.

Positive demand shock

A sudden increase in demand leading to an inflationary gap.

Recessionary gap

A situation where actual output is less than potential output.

Inflationary gap

A situation where actual output exceeds potential output.

Reservation wage

The lowest wage at which a worker would be willing to accept a particular type of job.

Efficiency wages

Wages that are higher than the market equilibrium, designed to increase worker productivity.

NAIRU

Non-Acceleration Inflation Rate of Unemployment, the level of unemployment where inflation does not accelerate.

Trade patterns

The flow of goods and services between countries, determined by comparative advantage.

Terms of trade

The ratio of the prices of a country's exports to the prices of its imports.

Comparative advantage

The ability of a country to produce a good at a lower opportunity cost than another country.

Absolute advantage

The ability of a country to produce more of a good with the same resources than another country.

Monetary policy

The actions taken by a central bank to manage the money supply and interest rates to influence the economy.

Fiscal policy

Government spending and tax policies used to influence economic conditions.

Expansionary monetary policy

A decrease in interest rates or an increase in the money supply to stimulate economic growth.

Contractionary monetary policy

An increase in interest rates or a decrease in the money supply to curb inflation.

Inflation targeting

A monetary policy strategy aimed at maintaining a specific inflation rate, often achieved by adjusting interest rates.

Liquidity trap

A situation where interest rates are low and savings rates are high, rendering monetary policy ineffective.

Output gap

The difference between potential output and actual output.

Short-run aggregate supply (SRAS)

The total production of goods and services in the economy over a short time frame, assuming certain prices are sticky.

Long-run aggregate supply (LRAS)

The total production of goods and services in the economy when all prices have fully adjusted, reflecting potential output.

Negative supply shock

An event that reduces the supply of goods and services, leading to an increase in prices and a decrease in output.

Positive supply shock

An event that increases the supply of goods and services, leading to lower prices and higher output.

Nominal interest rate

The stated interest rate on a loan or investment before adjusting for inflation.

Real interest rate

The interest rate that has been adjusted to remove the effects of inflation.

Monetary transmission mechanism

The process through which changes in monetary policy affect the economy, influencing output and inflation.

Structural unemployment

Unemployment resulting from industrial reorganization, typically due to technological change.

Frictional unemployment

Temporary unemployment during the transition between jobs.

Cyclical unemployment

Unemployment linked to the fluctuations in the business cycle.

Labour market turnover

The movement of workers between jobs and unemployment over time.

Economies of scale

Cost advantages gained by increased output, with efficiency increasing as production scales up.

Learning by doing

The idea that increased efficiency comes from practice and experience in production.

Output levels

The volume of goods and services produced by an economy.

Exchange rate depreciation

A decrease in the value of a currency relative to others, making exports cheaper and imports more expensive.

Exchange rate appreciation

An increase in the value of a currency relative to others, making exports more expensive and imports cheaper.

Import restrictions

Government policies that limit the quantity of goods that can be imported, typically to protect domestic industries.

Consumer price index (CPI)

A measure that examines the weighted average of prices of a basket of consumer goods and services.

Macroeconomic equilibrium

The point where aggregate supply equals aggregate demand.

Comparative advantage theory

Economic theory stating that countries should specialize in producing goods where they have a lower opportunity cost.

Net exports

Exports minus imports; measures the trade balance of a country.

International trade

Exchange of goods and services across international borders.

Interest rate parity

A theory that posits the relationship between interest rates and exchange rates between two countries.

Demand-pull inflation

Inflation that is caused by an increase in aggregate demand.

Cost-push inflation

Inflation that is caused by an increase in the costs of production.

Adaptive expectations

A theory of expectations where individuals form future expectations based on past experiences.

Rational expectations

A theory of expectations formation wherein individuals make forecasts based on all available information.

Disinflation

A reduction in the rate of inflation; it's not deflation but a decrease in the inflation rate.

Stagflation

A combination of stagnant economic growth, high unemployment, and high inflation.

Perfect competition

A market structure characterized by a complete absence of rivalry among the individual firms.

Market failure

A situation in which the allocation of goods and services is not efficient.

Public goods

Goods that are non-excludable and non-rivalrous, benefiting all individuals regardless of payment.

Externalities

Costs or benefits incurred by a third party who did not agree to the action causing the cost or benefit.

Monopoly

A market structure where a single seller dominates, and entry to the market is restricted.

Oligopoly

A market structure characterized by a small number of firms, each of which has some control over the market.

Marginal analysis

Analysis that involves comparing the additional benefits of an action to the additional costs.

Short-run aggregate demand (SRAD)

The total amount of goods and services demanded in the economy at a given overall price level.

Long-run aggregate supply (LRAS)

The total supply of goods and services that an economy can produce when both capital and labor markets are in equilibrium.

Central bank

A national bank that provides financial and banking services for its country's government and commercial banking system.

Capital mobility

The ability of capital to move freely across borders to obtain the highest return.

Exchange rate fluctuations

Variations in the exchange rate over time, affecting trade balances and investment.

Policy lags

Delays between the recognition of an economic problem and the implementation of a policy response to address it.

Investment multiplier

The ratio of change in national income to the change in investment.

Effective demand

The actual demand for goods and services in the economy, as opposed to the potential demand.

Human capital

The skills, knowledge, and experience possessed by an individual or population.

Natural rate of unemployment

The level of unemployment that is expected in a growing economy due to normal labor market turnover.

Nominal gross domestic product (GDP)

The total monetary value of all final goods and services produced in a country during a specific time period, measured using current prices.

Real gross domestic product (GDP)

The total monetary value of all final goods and services produced in a country during a specific time period, adjusted for inflation.

Deflation

A decrease in the general price level of goods and services occurring when the inflation rate falls below 0%.

Depression

A deeper and prolonged downturn in economic activity, often defined by a significant decline in GDP.

Liquidity preference

The desire to hold cash or easily cashable assets rather than investments.

Substitution effect

The change in consumption patterns due to a change in the relative prices of goods.

Income effect

The change in quantity demanded of a good resulting from a change in consumer income.

Negative feedback loop

A situation in which a change in a system causes a response that counteracts that change.

Positive feedback loop

A situation where a change in a system causes a response that reinforces that change.

Economic cycle

The natural fluctuation of the economy between periods of expansion and contraction.

Expansion

A phase of the economic cycle where economic activity is increasing.

Contraction

A phase of the economic cycle where economic activity is decreasing.