MACRO MID1

Macroeconomics

The branch of economics that focuses on the behavior of the economy as a whole, examining the actions of all individuals and all firms together rather than separately.

Microeconomics

The branch of economics that focuses on decisions made by individual households and firms, rather than the economy as a whole.

Paradox of Thrift

The idea that when individuals try to save more during hard economic times by cutting spending → total spending in the economy falls → depresses the economy → firms to lay off → makes everyone worse off.

Self-regulating Economy

The pre-1930s belief that economic problems such as unemployment would correct themselves through the invisible hand, and that government intervention would likely make outcomes worse.

Keynesian Economics

The post-1930s view that a depressed economy is caused by inadequate spending and that government intervention can help stabilize the economy through monetary and fiscal policy.

Business Cycle

The short-run alternation between periods of economic downturn (recessions) and economic upturn (expansions).

Recession (Contraction)

A period of economic downturn in which output and employment are falling.

Expansion (Recovery)

A period of economic upturn in which output and employment are rising.

Business-Cycle Peak

The point at which the economy transitions from expansion to recession.

Business-Cycle Trough

The point at which the economy transitions from recession to expansion.

Unemployment

the total number of people who are

actively looking for work but aren’t currently employed.

Bankruptcy

The failure of businesses—especially small businesses—that can result from reduced profits during recessions.

Monetary Policy

Government policy that uses changes in the quantity of money to alter interest rates, which then affect the level of overall spending in the economy.

Fiscal Policy

Government policy that uses changes in taxes and government spending to affect the overall level of spending in the economy.

Government Intervention

Actions taken by the government—primarily through monetary and fiscal policy—to stabilize the economy and reduce the severity of recessions.

Long-Run Economic Growth

The sustained upward trend in an economy’s output over time, driven by increases in the economy’s potential and responsible for rising living standards.

Economic Output

The total production of goods and services in an economy, which increases over time through long-run economic growth.

Inflation

A rise in the overall level of prices in the economy.

Deflation

A fall in the overall level of prices in the economy.

Overall Level of Prices

The average of prices across the entire economy, which rises with inflation and falls with deflation.

Money Supply

The total amount of money circulating in the economy, which determines the overall level of prices in the long run.

Price Stability

A condition in which the overall level of prices changes slowly over time, viewed by economists as a desirable macroeconomic goal.

Open Economy

An economy that trades goods and services with other countries.

Trade Deficit

A situation in which the value of goods and services a country imports exceeds the value of goods and services it exports.

Trade Surplus

A situation in which the value of goods and services a country exports exceeds the value of goods and services it imports.

International Imbalances

Differences between a country’s exports and imports that result from national saving and investment decisions.

Savings

Income that is not spent on consumption, which helps determine whether a country runs a trade deficit or surplus.

Investment Spending

Spending on productive assets, which—relative to savings—determines whether a country runs a trade deficit or surplus.

Stock

A position measured at a moment in time, such as the stock of inventories at the end of a year. Balance sheets report stocks.

Flow

A rate of change in a stock over a period of time, such as the change in inventories during a year. Profit-and-loss statements report flows.

National Income and Product Accounts (National Accounts)

A system used to measure and track the spending of consumers, sales of producers, business investment spending, government purchases, and other flows of money between sectors of the economy.

Circular-Flow Diagram

A visual representation showing how money flows between households, firms, government, financial markets, and the rest of the world through spending, income, saving, and borrowing.

Consumer Spending (C)

Household spending on goods and services.

Investment Spending (I)

Spending on productive physical capital (machinery, buildings) and changes in inventories.

Government Purchases (G)

Total expenditures on goods and services by federal, state, and local governments; excludes transfers.

Exports (X)

Goods and services sold to other countries.

Imports (IM)

Goods and services purchased from other countries.

Net Exports (NX)

Exports minus imports

equal to the trade balance.

Gross Domestic Product (GDP)

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

Market Value

GDP adds goods and services by using their dollar values to aggregate different products.

Final Goods and Services

Goods and services sold to the final user, included in GDP.

Intermediate Goods

Goods used as inputs in the production of other goods; excluded from GDP to avoid double counting.

Gross National Product (GNP)

The market value of final goods and services produced by a country’s citizens regardless of where production occurs.

Value-Added Approach

GDP calculated by summing each producer’s value added, defined as the value of sales minus the value of intermediate goods.

Aggregate Spending

Total spending on domestically produced final goods and services:

GDP = C + I + G + X − IM

C= consumer spending

I=investment spending

G=gov purchases of goods and services

X=sales to foreigners

IM=imports

Factor Income

GDP calculated by adding wages

Wages

Income earned by labor.

Interest

Income paid on savings used as capital.

Rent

Income earned from leasing land or assets.

Dividends / Profits

Income earned by shareholders from firm profits.

Net Domestic Income at Factor Cost

The sum of all factor incomes before adjusting for taxes, subsidies, and depreciation.

Indirect Taxes Less Subsidies

Added to move from factor cost to market prices.

Depreciation

Added to move from net domestic income to gross domestic income.

Included in GDP

• Domestically produced final goods and services

• Capital goods

• New construction

• Changes in inventories

Excluded from GDP

• Intermediate goods

• Used goods

• Financial assets (stocks, bonds)

• Imports

Aggregate Output

The total quantity of final goods and services produced by the economy.

Nominal GDP

The value of final goods and services calculated using current-year prices.

Real GDP

The value of final goods and services calculated using prices from a selected base year.

Base Year (Reference Year)

The year whose prices are used to calculate real GDP.

Chained Dollars

A method of calculating real GDP growth using an average of growth rates based on early and late base years.

GDP per Capita

Average GDP per person

used as a rough indicator of living standards but not a complete measure of quality of life.

Aggregate Price Level

A measure of the overall level of prices in the economy.

Market Basket

A hypothetical set of consumer purchases of goods and services used to calculate price indexes.

Price Index

The cost of purchasing a given market basket in a given year, normalized so that it equals 100 in the base year.

Inflation Rate

The yearly percentage change in a price index, usually based on the CPI.

Consumer Price Index (CPI)

Measures the cost of a market basket for a typical urban American family; the most common measure of the aggregate price level.

Producer Price Index (PPI)

Measures changes in prices of goods purchased by producers.

GDP Deflator

Measures the price level by calculating the ratio of nominal GDP to real GDP.

GDP Deflator = (Nominal GDP / Real GDP) × 100

Limitations of GDP - exclusions

GDP excludes

• nonmarket activities

• leisure

• product quality improvements

• informal economy activity

• environmental damage

• income distribution

• noneconomic sources of well-being.

Genuine Progress Indicator (GPI)

An adjusted GDP measure that accounts for welfare-reducing activities such as crime, resource depletion, and quality-of-life factors.

PPP-Adjusted GDP

GDP adjusted using purchasing power parity to account for differences in price levels across countries, especially for non-tradable goods.

Public-Sector Efficiency

The degree to which government spending actually produces services; GDP treats all government spending as value added regardless of effectiveness.

Efficiency-Adjusted GDP

A proposed correction to GDP that weights government spending by an efficiency parameter to reflect actual output produced.

Employment

The total number of people currently employed

Unemployment

The total number of people who are actively looking for work but are not currently employed.

Labor Force

The sum of employment and unemployment.

Adult Population

People age 16 and older.

Labor Force Participation Rate

The percentage of the adult population that is in the labor force.

Labor force participation rate = (Labor force / Population age 16 and older) × 100

Unemployment Rate

The percentage of people in the labor force who are unemployed.

Unemployment rate = (Number of unemployed / Labor force) × 100

Lost Income

Income foregone by unemployed workers; employment benefits only partially replace lost wages.

Lost Production

Output that is never produced because unemployed workers are not working.

Human Capital

A worker’s accumulated skills, experience, and training.

Loss of Human Capital

The permanent damage to job prospects caused by prolonged unemployment.

Overstatement of Unemployment

The unemployment rate can overstate joblessness because it counts people who are temporarily between jobs and actively searching.

Understatement of Unemployment

The unemployment rate can understate joblessness because it excludes discouraged workers and some underemployed workers.

Discouraged Workers

People who have given up looking for a job because they believe no jobs are available.

Marginally Attached Workers

People who have looked for work in the past 12 months but not in the last 4 weeks.

Underemployed

Workers who want full-time jobs but are currently working part time.

U-1

People unemployed for 15 weeks or more.

U-2

Unemployed job losers.

U-3

The official unemployment rate.

U-4

the official unemployment rate + discouraged workers.

U-5

the official unemployment rate + discouraged workers + marginally attached workers.

U-6

the official unemployment rate + discouraged workers + part-time workers who want full-time jobs.

Group Unemployment Rates

Unemployment rates differ systematically by race and age, with particularly high unemployment among teenagers, especially Black teenagers.

Negative Relationship Between Growth and Unemployment

When economic growth is above average, unemployment tends to fall; when growth is below average, unemployment tends to rise.

Job Creation

The process by which new jobs are continually created in the economy.

Job Destruction

The process by which existing jobs are continually eliminated.

Frictional Unemployment

Unemployment due to the time workers spend searching for jobs.

• Caused by imperfect information

• Occurs because matching workers to jobs takes time

• A permanent and healthy feature of a growing economy

Structural Unemployment

Unemployment that occurs when more people are seeking jobs in a particular labor market than there are jobs available at the current wage rate