Intro to Macroeconomics Exam 1: UC Professor Erhardt

economy

the structure of economic activity in a community, a region, a country, or a group of countries, or the world

gross domestic product (GDP)

the market value of all final goods and services produced in the nation during a particular period-usually a year

flow variable

a variable that measures something over an interval

stock variable

a variable that measures something at a particular point in time, such as the amount of money you have with you right now

recession

a decline in the economy's total output lasting at least two consecutive quarters (6 months); an economic contraction

inflation

an increase in the economy's average price level

expansion

a phase of economic activity during which the economy's output increases

leading economic indicators

variables that lead to, or predict a recession or a recovery; examples include consumer confidence, stock market prices, business investment, and big-ticket purchases, such as automobiles and homes

lagging economic indicators

variables that follow, or trail, changes in overall economic activity; examples include the interest rate and the average duration of employment

coincident economic indicators

variables that reflect peaks and troughs as they occur; examples include employment, personal income, and industrial production

aggregate output

a composite measure of all final goods and services produced in an economy during a given period; Real GDP

aggregate demand

the relationship between the economy's price level and the quantity of aggregate output demanded (other things constant)

price level

a composite measure reflecting the price of all goods and services in the economy relative to prices in a base year

real gross domestic product (real GDP)

the economy's aggregate output measured in dollars of constant purchasing power

aggregate demand curve

a curve representing the relationship between the economy's price level and real GDP demanded per period (other things constant) [graph]

aggregate supply curve

a curve representing the relationship between the economy's price level and real GDP supplied per period (other things constant) [graph]

Higher Level of GDP=

1. more goods and services in the economy

2. more people probably employed

federal budget

a plan for federal government outlays and revenues of a specific period, usually a year

federal budget deficit

a flow variable that measures the amount by which federal government outlays exceed federal government revenues in a particular period, usually a year

demand-side economics

macroeconomic policy that focuses shifting the aggregate demand curve as a way of promoting full employment and price stability

fiscal policies

government spending and taxes and monetary policies

stagflation

a contraction, or stagnation of a nation's output accompanied by inflation in the price level; rising prices and unemployment, rising interest rate by the Fed.

supply-side economics

macroeconomics policy that focuses on a rightward shift of the aggregate supply curve through tax cuts or other changes that increase production incentives

financial markets

banks and other financial institutions that facilitate the flow or funds from savers to borrowers

leakage

any diversion of income from the domestic spending stream; includes: savings, taxes, and imports

injection

any spending other than by households or any income other than from resource earnings; includes investment, government purchases, exports, and transfer payments

depreciation

the value of capital stock used up to produce GDP or that becomes obsolete during a year

net domestic production

gross domestic product minus depreciation

nominal GDP

GDP based on prices prevailing based on the time of the transaction; current dollar GDP

base year

the year with which other years are compared when creating an index; the index equals 100 in the base year

price index

a number that shows the average price of goods; changes in the price index over time shows changes in the economics average price level

consumer price index (CPI)

a measure of inflation based on the cost of a fixed market basket of goods and services

GDP price index

a comprehensive price index of all goods and services included in the gross domestic product

chain-weighted system

an index that adjusts the weights from year to year in calculating price index, thereby getting rid of the bias caused by a fixed-price weighting system

expenditure approach to GDP

a method of calculating GDP by adding spending on all final goods and services produced in the nation during the year

income approach to GDP

a method of calculating GDP by adding all payments for resources used to produce output in the nation during the year

final goods and services

goods and services sold to final or end users

intermediate goods and services

goods and services purchased by firms for further reprocessing and resale

double counting

the mistake of including the value of intermediate goods plus the value of final goods in gross domestic product; counting the same good more than once

consumption

household purchases of final goods and services, except for new residences, which count as investments

investment

the purchase of new plants, new buildings, new equipment, and new residences. Plus net additions to inventories

physical capital

manufactured items used to produce goods and services; includes new plants and new equipment

residential construction

building new homes or dwelling places

inventories

producers' stocks of finished and in-process goods

government purchases

spending goods and services by al levels of government outlays minus transfer payments

net exports

the value of a country's exports minus the value of it's imports

aggregate expenditure

total spending on final goods and services during a given period, usually a year [C+I+G+(X-M)=AE=GDP]

aggregate income

the sum of all income earned by resource suppliers in an economy during a given period

value added

the difference of each stage of production between the selling price of a product and the cost of intermediate goods purchased from other firms

disposable income (DI)

the income households are available to spend or to save after paying taxes and receiving transfer payments

net taxes (NT)

taxes minus transfer payments

productivity

the quantity of goods and services produced from each unit of labor input (an economy's income is an economy's output)

physical capital (to determine productivity)

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

human capital (to determine productivity)

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

natural resources (to determine productivity)

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

technical knowledge (to determine productivity)

society's understanding of the best ways to produce goods/services

world bank

human capital and rule of law constitute the large share of wealth to virtually all countries

diminishing returns

the property whereby the benefit from an extra unit of an input declines as the quantity of the input increases

catch-up effect

the property whereby the countries that start off poor tend to grow more rapidly than economies that start off rich

foreign direct investment

a capital investment that is owned and operated by a foreign entity

foreign portfolio investment

an investment that is financed with foreign money but operated by domestic investments

production

a process that transforms resources into goods and services

productivity (2)

the ratio of a specific measure of output, such as real GDP, to a specific measure of input, such as labor, in this case productivity measures real GDP per hour of labor

labor productivity

output per unit of labor; measured as real GDP divided by the hours of labor employed to produce that output

pre-worker production function

the relationship between the amount of capital per worker in the economy and the average output per worker

capital deepening

an increase in the amount of capital per worker; one source of rising labor productivity

rules of the game

the laws, customs, manners, conventions, and other institutional elements that determine transaction costs and thereby affect people's incentive to undertake production and exchange

industrial market countries

economically advanced capitalist countries of Western Europe, North America, Australia, New Zealand, and Japan, plus the newly industrialized Asian economies of Taiwan, South Korea, Hong Kong, and Singapore

developing countries

countries with a lower living standard because of less human and physical capital per worker

basic research

the search for knowledge without regard to how that knowledge will be used

applied research

research that seeks answers to particular questions or to apply scientific discoveries to develop specific products

industrial policy

the view that government- using taxes, subsidies, and regulations- should nurture the industry and technologies of the future, thereby giving these domestic industries an advantage over foreign competition

property rights

peoples ability to exercise authority over the resources they own

inward oriented policies

attempt to increase productivity and living standards within the country by avoiding interaction with the rest of the world

outward oriented policies

international trade in goods and services can improve the economic well being of a country's citizens, knowledge is a public good

labor force

those 16 years of age and older who are either working or looking for work

unemployment rate

the number unemployed as a percentage of the labor force

discouraged workers

those who drop out of the labor force in frustration because they can't find work

labor force participation rate

the labor force as a percentage of the adult population

long-term unemployment

those looking for work for 27 weeks or longer

frictional unemployment

unemployment that occurs because job seekers and employers need time to find eachother

seasonal unemployment

unemployment caused by seasonal changes in the demand for certain kinds of labor

structural unemployment

unemployment because 1. the skills in demand do not match those of the unemployed 2. the unemployed do not live where the jobs are

cyclical unemployment

unemployment that fluctuates with the business cycle, increasing during contractions and decreasing during expansions

full employment

employment level where there is now cyclical unemployment

unemployment benefits

cash transfers for those who lose their jobs and are actively seeking employment

underemployment

workers are overqualified for their jobs or work fewer hours than they would prefer

hyperinflation

a very high rate of inflation

deflation

a sustained decrease in price level

disinflation

a reduction, in the rate of inflation

demand-pull inflation

a sustained rise in the price level caused by a rightward shift of the aggregate demand curve

cost-push inflation

a sustained rise in the price level caused by a leftward shift of the supply curve (often called a wage price spiral)

interest

the dollar amount paid by borrowers to lenders

interest rate

interest per year as a percentage of the amount loaned

nominal interest rate

the interest rate expressed in current dollars as a percentage of the amount loaned; the interest rate of the loan agreement

real interest rate

the interest rate expressed in dollars of constant purchasing power as a percentage of the amount loaned; the nominal interest rate minus the inflation rate

cost of living adjustments (COLA)

the increase in a transfer payment or wage that reflects the increase in the price level