ECON1002 – Lecture 1: Macroeconomic Foundations & National Accounting

A set of vocabulary flashcards covering key terms introduced in the first ECON1002 lecture: macroeconomic scope, national-income accounting concepts, GDP measurement methods, the saving–investment framework, and essential distinctions such as stocks vs. flows and nominal vs. real variables.

Macroeconomics

Branch of economics that studies system-level behaviour of the economy as a whole—output, employment, inflation, and policy.

Aggregate Level of Economic Activity

Overall level of production (output) in the economy, often proxied by GDP.

Aggregate Price Level

Average level of prices for all goods and services in an economy; changes are studied as inflation or deflation.

Aggregate Labour Market

Economy-wide market for labour, analysed via employment and unemployment rates.

Fallacy of Composition

Mistake of assuming that what is true for an individual part is automatically true for the whole (e.g., wage cuts improving employment for a firm vs. for the economy).

Paradox of Thrift

Idea that while saving is beneficial for an individual, higher aggregate saving can reduce national income and overall saving in the economy.

Micro Foundations

Attempt to ensure macroeconomic theories are logically consistent with micro-level behaviour of firms and households.

Ceteris Paribus

Latin for “other things being equal”; holding all else constant when analysing cause and effect.

Gross Domestic Product (GDP)

Market value of all final goods and services produced within a country during a specified period.

Final Goods and Services

Outputs purchased for final use, not for further processing or resale; counted in GDP.

Intermediate Goods

Goods and services used as inputs in the production of other goods; their value is excluded from GDP to avoid double counting.

Value Added

A firm’s output value minus the value of intermediate inputs; summing value added across industries equals GDP.

Expenditure Approach to GDP

Measures GDP as total spending: Y = C + I + G + (X – M).

Income Approach to GDP

Measures GDP as the sum of incomes generated in production: wages + profits + rents + interest, adjusted for depreciation, taxes and subsidies.

Private Consumption (C)

Household spending on goods and services for current use.

Private Gross Fixed Capital Formation (I)

Business spending on newly produced capital goods and inventory changes; economists’ strict definition of investment.

Government Expenditure (G)

Government purchases of goods and services, including infrastructure (capital) and recurrent spending.

Net Exports (X – M)

Exports minus imports; measures net foreign demand for domestic output.

Gross National Expenditure (GNE)

Domestic spending component of demand: C + I + G.

Saving

Disposable income not used for consumption; equals private saving plus public (government) saving.

Disposable Income

Household income after paying taxes; basis for calculating private saving.

Budget Balance (Public Saving)

Government revenue (mainly taxes) minus government expenditure; a surplus is positive public saving.

Stocks vs. Flows

Stock variables are measured at a point in time (e.g., wealth, debt); flow variables are measured per period (e.g., income, saving, GDP).

Nominal GDP

GDP measured at current market prices; reflects changes in both quantities and prices.

Real GDP

GDP adjusted for price changes, holding prices constant to reveal changes in physical output.

Indirect Taxes

Taxes on production or sale of goods (e.g., excise, GST) that raise market prices and are added in the income measure of GDP.

Subsidies

Government payments that lower market prices; subtracted in the income measure of GDP.

Vertical Integration (in Accounting Example)

Collapsing successive production stages to trace all wages and profits back to the final good, avoiding double counting.

Identity (≡)

An equation that holds by definition in accounting, not by behavioural causation (e.g., GDP ≡ C + I + G + X – M).