Macroeconomics Exam 2 Vocabulary

ECON 2305

labor force

employed + unemployed people looking for work

unemployed

no job but actively looking for work

not in labor force

not working and not looking (students, retirees, discouraged workers)

unemployment rate

% of labor force that is unemployed

labor force participation rate

% of adult population in the labor force

discouraged workers

people who stopped looking for a job (NOT counted in unemployment rate)

frictional unemployment

short-term unemployment during job search

structural unemployment

mismatch between skills and job requirements

cyclical unemployment

unemployment caused by economic downturns

natural rate of unemployment

frictional + structural unemployment

inflation

sustained increase in overall price level

deflation

sustained decrease in overall price level

purchasing power

what money can buy

nominal value

value in current dollars

real value

value adjusted for inflation

market basket

fixed bundle of goods/services used to measure prices

base year

reference year for price comparison

price index

measure of price level relative to base year

consumer price index (CPI)

measures price changes for consumers

producer price index (PPI)

measures price changes for producers

GDP Deflator

measures price changes for all goods/services in GDP

anticipated inflation

expected inflation

unanticipated inflation

unexpected inflation

nominal interest rate

market interest rate

real interest rate

nominal interest rate adjusted for inflation

= nominal interest rate - inflation rate

product market

market for goods and services

factor market

market for inputs (labor, capital, land)

where businesses buy the resources they need to produce goods and services

• determines wages, interest, and rent based on derived demand

• derived demand: demand for inputs depends on the demand of the final output

Gross Domestic Product (GDP)

total value of final goods/services produced in a country

final goods

goods sold to end users

intermediate goods

goods used to produce other goods (NOT counted in GDP)

expenditure approach

GDP = C + I + G + X

C: consumer expenditure = household spending
I: gross domestic product investment = business spending on capital
G: government expenditures = government purchases
X: net exports = total exports - total imports

income approach

GDP calculated by summing all income paid to the four factors of production

GDI = wages + rent + interest + profit

→ GDP = GDI + indirect business taxes + depreciation

• wages: salaries and labor income

• rent: farms, houses, and stores; implicit rental value of owner-occupied houses, royalties received

• interest: interest received (savings accounts) - interest paid (mortgages)

• profits: gross corporate profits, proprietors’ income

depreciation

loss of value of capital over time

nominal GDP

GDP using current prices

real GDP

GDP adjusted for inflation

economic growth

increase in real GDP over time

real GDP per capita

GDP per person (standard of living measure)

labor productivity

output per worker

human capital

skills and education of workers

physical capital

machines, tools, infrastructure

technology

new methods of production

saving

income not spent

investment

spending on capital goods

rule of 70

years to double = 70 / growth rate

property rights

legal ownership of resources

economic development

improvements in living standards + quality of life

aggregate demand (AD)

total quantity of goods/services demanded across an entire economy at a given price level

total of all planned expenditures in the entire economy

aggregate supply (AS)

total production in the economy

long-run aggregate supply (LRAS)

the maximum sustainable output an economy can produce when all resources are fully employed and prices have adjusted

equilibrium (AD = LRAS)

where economy is stable (GDP vs. price level)

demand-pull inflation

inflation caused by increase in AD

cost-push (supply-side) inflation

inflation caused by decrease in supply (LRAS left)

secular deflation

falling prices due to economic growth (LRAS right)

driven by:

• rapid technological advancement

• aging demographics

• overcapacity

results in:

• low growth

• low interest rates

• stagnant demand

wealth effect

lower prices → people feel richer → spend more

interest rate effect

lower prices → lower interest → more spending

higher prices → higher interest → reduced spending

• causes aggregate demand curve to slope downward

open economy effect

lower prices → exports increase
higher prices → exports decrease

policy changes (i.e., government spending) have less of an effect on output because some demand “leaks” into imports, but have a greater effect on inflation in comparison to a closed economy

shifts in AD

caused by changes in spending (C, I, G, X)

shift in LRAS

caused by changes in resources, technology, productivity

non-income expense items

indirect business taxes and depreciation

• indirect business taxes: all business taxes except the tax on corporate profits; includes sales and business property taxes