Macroeconomics Unit 3 Vocabulary

national income product accounts

keep track of the flows of money among different sectors of the economy

household

a person or group of people who share income

firm

an organization that produces goods and services for sale

product markets

where goods and services are bought and sold

factor markets

where resources, especially capital and labor, are bought and sold

consumer spending

household spending on goods and services

stock

a share in the ownership of a company held by a shareholder

bond

a loan in the form of an IOU that pays interest

government transfers

payments that the government makes to individuals without expecting a good or service in return

disposable income

the total amount of household income available to spend on consumption and to save

private savings

disposable income that is not spent on consumption

financial markets

the banking, stock, and bond markets, which channel private savings and foreign lending into investment spending, government borrowing, and foreign borrowing

government borrowing

the amount of funds borrowed by the government in the financial markets

government purchases of goods and services

total expenditures on goods and services by federal, state, and local governments

exports

goods and services sold to other countries

imports

goods and services purchased from other countries

inventories

stocks of goods and raw materials held to facilitate business operators

investment spending

spending on new productive physical capital, such as machinery and structures, and on changes in inventories

final goods and services

goods and services sold to the final user

intermediate goods and services

goods and services bought from one firm by another firm to be used as inputs into the production of final goods and services

Gross domestic product (GDP)

the total value of all final goods and services produced in the economy during a given year

value-added approach

to survey firms and add up their contributions to the value of final goods and services

expenditure approach

to add up aggregate spending on domestically produced final goods and services in the economy- the sum of consumer spending, investment spending, government purchases of goods and services, and exports minus imports

aggregate spending

the total spending on domestically produced final goods and services in the economy-is the sum of consumer spending, investment spending, government purchases of goods and services, and exports minus imports

income approach

to add up the total factor income earned by households from firms in
the economy, including rent, wages, interest, and profit.

value added

the value of its sales minus the value of its purchases of inputs.

net exports

the difference between the value of exports and the value of imports
(X − IM).

aggregate output

the total quantity of final goods and services produced within an economy.

real GDP

the total value of all final goods and services produced in the economy during a given year, calculated using the prices of a selected base year in order to remove the effects of price changes.

nominal GDP

the total value of all final goods and services produced in the economy during a given year, calculated with the prices current in the year in which the output is produced.

chain-linking

the method of calculating changes in real GDP using the average between the growth rate calculated using an early base year & growth rate calculated using a late base year

GDP per capita

the GDP divided by the size of the population (average GDP per person)

**employed**

**people who are currently holding a job in the economy**

**unemployed**

**people who are actively looking for work but aren’t employed**

**labor force**

**sum of employed and unemployed**

**labor force participation rate**

**percentage of the population 16 and older that is in the labor force**

**unemployment rate**

**percentage of the labor force that is unemployed**

**discouraged workers**

**nonworking people who are capable of working but have given up looking for a job due to the state of the job market**

**marginally attached workers**

**would like to be employed and have looked for a job in the recent past but aren’t currently looking for work**

**underemployed**

**workers who would like to work more hours or who are overqualified for their jobs**

**job search**

**workers who spend time looking for employment**

**frictional unemployment**

**unemployment due to the time workers spend in job search**

**structural unemployment**

**unemployment that results when workers lack the skills required for the available job (more people seeking jobs in the labor market than there are available jobs)**

**efficiency wages**

**wages that employers set above the equilibrium wage rate as an incentive for better employee performance**

**natural rate of unemployment**

**the unemployment rate that arises from the effects of frictional plus structural unemployment**

**cyclical unemployment**

**the deviation of the actual rate of unemployment from the natural rate**

real wage\*

the wage rate divided by the price level to adjust for the effects of inflation or deflation

real income\*

income divided by the price level to adjust for the effects of inflation or deflation

inflation rate

the percentage increase in the overall level of prices per year

**shoe leather costs**

**the increased costs of transactions caused by inflation**

**menu costs**

**the real costs of changing listed prices**

**unit of account costs**

**arise from the way inflation makes money a less reliable unit of measurement**

nominal interest rate

the interest rate actually paid for a loan

real interest rate\*

the nominal interest rate minus the rate of inflation

disinflation

the process of bringing the inflation rate down

aggregate price level

a measure of the overall level of prices in the economy

price index

measures the cost of purchasing a given market basket in a given year (equals 100 in the selected base year)

market basket

a hypothetical set of consumer purchases of goods and services

consumer price index (CPI)

measures the cost of the market basket of a typical urban American family

producer price index (PPI)

measures the prices of goods and services purchased by producers

GDP deflator

for a given year is 100 times the ratio of nominal GDP to real GDP in that year

shrinkflation

you get less for your money than you used to

marginal propensity to consume (MPC)

the increase in consumer spending when disposable income rises by $1

marginal propensity to save (MPS)

1. the increase in household savings when disposable income rises by $1

autonomous change in aggregate spending

an initial rise or fall in aggregate spending that is the cause not the result of a series of income and spending changes

spending multiplier\*

the ratio of the total change in real GDP caused by an autonomous change in the aggregate spending to the size of the autonomous change

consumption function

how a household’s consumer spending varies with the household’s current disposable income

autonomous consumer spending

the amount of money a household would spend if it had no disposable income

aggregate consumption function\*

the relationship for the economy as a whole between aggregate current disposable income and aggregate consumer spending

planned investment spending

the investment spending that businesses intend to undertake during a given period

inventory investment

the value of the change in total inventories held in the economy during a given period

unplanned inventory investment

occurs when actual sales are lower than businesses expected, leading to unplanned increases in inventory

actual investment spending

the sum of planned investment spending and unplanned inventory investment

aggregate demand curve

shows the relationship between the aggregate price level and the quantity of aggregate output demanded by households

**wealth effect of a change in aggregate price level**

**the change in consumer spending caused by the altered purchasing power of consumers’ assets**

**interest rate effect of a change in aggregate price level**

**the change in investment and consumer spending caused by altered interest rates that result from changes in the demand for money**

**fiscal policy**

**the use of government purchases of goods and services, government transfers, or tax policy to stabilize the economy**

**monetary policy**

**the central bank’s use of changes in the quantity of money or the interest rate to stabilize the economy**

aggregate supply curve

the relationship between the aggregate price level and the quantity of aggregate output supplied in the economy

nominal wage

the dollar amount of the wage paid

sticky wage

nominal wages that are slow to fall even in the face of high unemployment and slow to rise in the face of labor shortages

short-run aggregate supply curve

the relationship between the aggregate price level and the quantity of aggregate output supplied that exists in the short-run, the time period when many production costs can be taken as fixed

long-run aggregate supply curve

the relationship between the aggregate price level and the quantity of aggregate output supplied that would exist if all prices, including nominal wages, were fully flexible

potential output

the level of real GDP the economy would produce if all prices, including nominal wages, were fully flexible

AD-AS model

the aggregate supply curve and aggregate demand curve are used together to analyze economics fluctuations

short-run macroeconomic equilibrium

when the quantity of aggregate output supplied is equal to the quantity demanded

interest rate

the price, calculated as a percentage of the amount borrowed, charged by lenders to borrowers for the use of their savings for one year

savings-investment spending identity\*

savings and investment spending are always equal for the economy as a whole

**budget surplus**

**the difference between tax revenue and government spending when tax revenue exceeds government spending**

**budget deficit**

**the difference between tax revenue and government spending when government spending exceeds tax revenue**

**budget balance**

**the difference between tax revenue and government spending**

national savings\*

the sum of private savings and the budget balance (total amount of savings generated within the economy

capital inflow\*

equal to the total inflow of foreign funds minus the total outflow of domestic funds to other countries

wealth

value of accumulated savings

financial asset

a paper claim that entitles the buyer to future income from the seller

physical asset

a claim on a tangible object that gives the owner the right to dispose of the object as he wishes

liability

a requirement to pay money in the future

transaction costs

the expenses of negotiating and executing a deal

financial risk

uncertainty about future outcomes that involve financial loses or gains

diversification

investing in several different assets with unrelated risks