Chapter 1-3 pure definitions

Aggregate Output

The total production of goods and services in an economy.

National Income and Product Accounts

An accounting system that defines and measures aggregate economic activity.

Gross Domestic Product (GDP)

The measure of aggregate output in the national income accounts.

Gross National Product (GNP)

A measure similar to GDP, differing in whether production is counted by location (“domestic”) or ownership (“national”).

Intermediate Good

A good used in the production of another good.

Final Good

A good that is not used as an input into another good and is counted in GDP.

Value Added

The value of a firm’s production minus the value of intermediate goods used in production.

Nominal GDP

The value of final goods and services produced, measured at current prices.

Real GDP

The value of final goods and services produced, measured at constant prices.

Real GDP in Chained Dollars

A measure of real GDP that uses changing weights reflecting relative prices over time.

Dollar GDP / GDP in Current Dollars

Another name for nominal GDP.

GDP in Constant Dollars / GDP Adjusted for Inflation

Other names for real GDP.

Real GDP per Person

Real GDP divided by the population; a measure of average standard of living.

GDP Growth

The rate of change of real GDP over time.

Expansions

Periods of positive GDP growth.

Recessions

Periods of negative GDP growth.

Hedonic Pricing

A method that values goods by their characteristics to adjust prices for quality change.

Employment

The number of people who have a job.

Unemployment

The number of people who do not have a job but are looking for one.

Labor Force

The sum of employed and unemployed people.

Unemployment Rate

The ratio of unemployed people to the labor force.

Current Population Survey (CPS)

A monthly household survey used in the United States to measure employment and unemployment.

Not in the Labor Force

People without a job who are not looking for one.

Discouraged Workers

People without a job who have stopped looking and are therefore not counted as unemployed.

Participation Rate

The ratio of the labor force to the working-age population.

Inflation

A sustained rise in the general level of prices.

Price Level

The average level of prices in the economy.

Inflation Rate

The rate at which the price level increases.

Deflation

A sustained decline in the price level (negative inflation).

GDP Deflator

The ratio of nominal GDP to real GDP; a measure of the price level for domestically produced goods.

Index Number

A number whose level is set arbitrarily and whose rate of change carries economic meaning.

Cost of Living

The cost of purchasing a given basket of consumption goods.

Consumer Price Index (CPI)

An index measuring the average price of goods and services consumed by households.

Okun’s Law

The empirical relationship between output growth and changes in unemployment.

Phillips Curve

The empirical relationship between unemployment and inflation.

Core Inflation

Inflation measured excluding volatile prices such as food and energy.

Short Run

A period of a few years, during which output is mainly demand-determined.

Medium Run

A period of about a decade, during which output is determined by supply factors.

Long Run

A period of several decades or more, during which output is determined by fundamental factors such as education, saving, and institutions.

Consumption (C)

Purchases of goods and services by consumers.

Investment (I)

Purchases of new capital goods; includes nonresidential and residential investment.

Fixed Investment

Investment excluding inventory investment; purchases of new plants, machines, and housing.

Nonresidential Investment

Purchases by firms of new plants or new machines.

Residential Investment

Purchases by households of new houses or apartments.

Government Spending (G)

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

Government Transfers

Payments by the government to individuals that are not purchases of goods or services (e.g., Social Security, Medicare).

Exports (X)

Purchases of domestic goods and services by foreigners.

Imports (IM)

Purchases of foreign goods and services by domestic consumers, firms, and government.

Net Exports (X − IM)

The difference between exports and imports.

Trade Balance

Another term for net exports.

Trade Surplus

A situation in which exports exceed imports.

Trade Deficit

A situation in which imports exceed exports.

Inventory Investment

The difference between production and sales in a given period.

Identity

An equation that is true by definition.

Disposable Income (YD)

Income after taxes minus transfers; the income available for consumption and saving.

Consumption Function

The relationship showing how consumption depends on disposable income.

Behavioral Equation

An equation that captures economic behavior (e.g., how consumers choose consumption).

Linear Relation

A relationship represented by a straight line, such as C = c₀ + c₁YD.

Parameter

A constant that characterizes a behavioral relationship (e.g., c₀ or c₁).

Propensity to Consume (c₁)

The fraction of an additional dollar of disposable income that is consumed.

Endogenous Variables

Variables determined within the model.

Exogenous Variables

Variables taken as given in the model.

Fiscal Policy

Government decisions about spending (G) and taxes (T).

Equilibrium

A situation in which key economic variables are consistent with one another.

Equilibrium in the Goods Market

The condition that production equals demand.

Equilibrium Condition

An equation that must hold in equilibrium (e.g., Y = Z).

Autonomous Spending

The part of demand that does not depend on income.

Balanced Budget

A situation in which government spending equals taxes (G = T).

Multiplier

The factor by which output changes in response to a change in autonomous spending; equal to 1 / (1 − c₁).

Geometric Series

A series in which each term is a constant fraction of the previous one.

Econometrics

Statistical methods used to estimate economic relationships.

Dynamics

The adjustment of economic variables over time.

Private Saving (S)

Disposable income minus consumption.

Public Saving (T − G)

Taxes minus government spending.

Budget Surplus

A situation in which public saving is positive (T > G).

Budget Deficit

A situation in which public saving is negative (T < G).

Saving

The sum of private saving and public saving.

IS Relation

The equilibrium condition that investment equals saving.

Propensity to Save

The fraction of an additional dollar of disposable income that is saved; equal to 1 − c₁.

Paradox of Saving

The result that attempts to save more can reduce output without increasing total saving in the short run.