Intro to Macroeconomics - Terms

Scarcity

The limited nature of society’s resources

Economics

The study of how society manages its scarce resources

Efficiency

the property of society getting the most it can from its scarce resources

Equality

the property of distributing economic prosperity uniformly among the members of society

Opportunity Cost

whatever must be given up to obtain some item

Rational People

people who systematically and purposefully do the best they can to achieve their objectives

Marginal Change

an incremental adjustment to a plan of action

Incentive

Something that induces a person to act

Market economy

an economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services

Property Rights

the ability of an individual to own and exercise control over scarce resources

Market Failure

a situation in which a market left on its own does not allocate resources efficiently

Externality

the impact of one person’s actions on the well-being of a bystander

Market Power

the ability of a single economic actor (or small group of actors) to have a substantial influence on market prices

Productivity

the quantity of goods and services produced from each unit of labor input

Inflation

an increase in the overall level of prices in the economy

Business Cycle

fluctuations in economic activity, such as employment and production

Circular-Flow Diagram

a visual model of the economy that shows how dollars flow through markets among households and firms

Production Possibilities Frontier (PPF)

a graph that shows the combinations of output that the economy can possibly produce with the available factors of production and production technology

Microeconomics

the study of how households and firms make decisions and how they interact in markets

Macroeconomics

the study of economy-wide phenomena, including inflation, unemployment, and economic growth

Positive Statements

claims that attempt to describe the world as it is

Normative Statements

claims that attempt to prescribe how the world should be

Absolute Advantage

the ability to produce a good using fewer inputs than another producer

Comparative Advantage

the ability to produce a good at a lower opportunity cost than another producer

Imports

goods produced abroad and sold domestically

Exports

goods produced domestically and sold abroad

Gross Domestic Product(GDP)

the market value of all final goods and services produced within a country in a given period

Consumption

spending by households on goods and services, with the exception of purchases of new housing

Investment

spending on business capital, residential capital, and inventories

Government Purchases

spending on goods and services by local, state, and federal governments

Net Exports

spending on domestically produced goods by foreigners (exports) minus spending on foreign goods by domestic residents (imports)

GDP Deflator

a measure of the price level calculated as the ratio of nominal GDP to real GDP times 100

nominal GDP

the production of goods and services valued at current prices

Real GDP

the production of goods and services valued at constant prices

Consumer Price Index (CPI)

a measure of the overall cost of the goods and services bought by a typical consumer, calculated by CPI= (Price of Basket Goods and Services in current year/Price of basket in base year) x 100

core CPI

a measure of the overall cost of consumer goods and services excluding food and energy

Producer Price Index

a measure of the cost of a basket of goods and services sold by domestic firms

Indexed

the automatic correction by law or contract of a dollar amount for the effects of inflation

Nominal Interest Rates

the interest rate as usually reported without a correction for the effects of inflation

Real Interest Rate

the interest rate corrected for the effects of inflation

Productivity

the quantity of goods and services produced from each unit of labor

Physical Capital

the stock of equipment and structures that are used to produce goods and services

Human Capital

the knowledge and skills that workers acquire through education, training, and experience

Natural resources

the inputs into the production of goods and services that are provided by nature, such as land, rivers, and mineral deposits

Technological Knowledge

society’s understanding of the best ways to produce goods and services

Financial System

the group of institutions in the economy that help to match one person’s saving with another person’s investment

Financial Markets

financial institutions through which savers can directly provide funds to borrowers

Bond

a certificate of indebtedness

Labor Force

the total number of workers, including both the employed and unemployed

Unemployment Rate

the percentage of the labor force that is unemployed

Labor-Force Participation Rate

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

Natural Rate of Unemployment

the normal rate of unemployment around which the unemployment rate fluctuates

Cyclical Unemployment

the deviation of unemployment from its natural rate

Discouraged Workers

individuals who would like to work but have given up looking for a job

Frictional Unemployment

unemployment that results because it takes time for workers to search for the jobs that best suit their tastes and skills

Structural Unemployment

unemployment that results because the number of jobs available in some labor markets is insufficient to provide a job for everyone who wants one

Job Search

the process by which workers find appropriate jobs given their tastes and skills

Unemployment Insurance

a government program that partially protects the incomes of workers who become unemployed

Union

a worker association that bargains with employers over wages, benefits, and working conditions

Collective Bargaining

the process by which unions and firms agree on the terms of employment

Money

the set of assets in an economy that people regularly use to buy goods and services

Medium of exchange

an item that buyers give to sellers when they want to purchase goods and services

Unit of Account

the yardstick people use to post prices and record debts

Store of Value

an item that people can use to transfer purchasing power from the present to the future

Liquidity

the ease with which an asset can be converted into the economy’s medium of exchange