Econ

Gross domestic product (GDP)

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

GDP Identity (Formula)

Consumption + Investment + Government Purchases + Net Exports

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)

Nominal GDP

The production of goods and services valued at current prices

Real GDP

The production of goods and services valued at constant prices

GDP deflator

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

GDP deflator (Formula)

(Nominal GDP / Real GDP) x 100

Consumer price index (CPI)

A measure of the overall cost of the goods and services bought by a typical consumer

CPI (Formula)

(Cost of basket in current year / Cost of basket in base year) x 100

Inflation rate

The percentage change in the price index from the preceding period

Inflation rate (Formula)

((CPI in current year - CPI in previous year) / CPI in previous year) x 100

Amount in today's dollars (Formula)

Amount in past year dollars x (Price level today / Price level in past year)

Core CPI

Measure of the overall cost of consumer goods and services excluding food and energy

Producer price index (PPI)

Measure of the cost of a basket of goods and services bought by firms

Indexation

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

Nominal interest rate

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

Real interest rate

Interest rate corrected for the effects of inflation

Real interest rate (Formula)

Nominal interest rate - Inflation rate

Financial system

Group of institutions in the economy that help 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 that specifies the obligations of the borrower to the buyer of the bond

Stock

Claim to partial ownership in a firm

Financial intermediaries

Financial institutions through which savers can indirectly provide funds to borrowers

Mutual fund

An institution that sells shares to the public and uses the proceeds to buy a portfolio of stocks and bonds

National saving

Total income in the economy that remains after paying for consumption and government purchases

National saving (Formula)

GDP - Consumption - Government Purchases

Private saving

Income that households have left after paying for taxes and consumption

Private saving (Formula)

GDP - Taxes - Consumption

Public saving

Tax revenue that the government has left after paying for its spending

Public saving (Formula)

Taxes - Government Purchases

Budget surplus

Excess of tax revenue over government spending

Budget deficit

Shortfall of tax revenue from government spending

Market for loanable funds

The market in which those who want to save supply funds and those who want to borrow to invest demand funds

Crowding out

Decrease in investment that results from government borrowing

Finance

The field that studies how people make decisions regarding the allocation of resources over time and the handling of risk

Present value

The amount of money today needed to produce a future amount of money, given prevailing interest rates

Present value (Formula)

Future Amount / (1 + Interest Rate)^Number of Years

Future value

The amount of money in the future that an amount of money today will yield, given prevailing interest rates

Future value (Formula)

Present Value x (1 + Interest Rate)^Number of Years

Compounding

The accumulation of a sum of money in, say, a bank account, where the interest earned remains in the account to earn additional interest in the future

Risk aversion

Dislike of uncertainty

Diversification

The reduction of risk achieved by replacing a single risk with a large number of smaller, unrelated risks

Firm-specific risk

Affects only a single company

Market risk

Affects all companies in the stock market

Fundamental analysis

The study of a company's accounting statements and future prospects to determine its value

Efficient markets hypothesis

Theory that asset prices reflect all publicly available information about the value of an asset

Informational efficiency

Description of asset prices that rationally reflect all available information

Random walk

The path of a variable whose changes are impossible to predict

Labor force

Total number of workers, including both the employed and unemployed

Unemployment rate

Percentage of the labor force that is unemployed

Unemployment rate (Formula)

(Number of unemployed / Labor force) x 100

Labor-force participation rate

Percentage of the adult population that is in the labor force

Labor-force participation rate (Formula)

(Labor force / Adult population) x 100

Natural rate of unemployment

Normal rate of unemployment around which the unemployment rate fluctuates

Cyclical unemployment

Deviation of unemployment from its natural rate; associated with short-run fluctuations in economic activity

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

Strike

The organized withdrawal of labor from a firm by a union

Efficiency wages

Above-equilibrium wages paid by firms to increase worker productivity