Economic Growth: An increase in a society’s ability to meet the needs and wants of citizens utilizing the scarce factors of production available. Economists usually look to changes in real GDP per capita as the most important measure of economic growth.
Capital Deepening: Capital deepening is a situation where the capital per worker is increasing in the economy. This is also referred to as an increase in the capital intensity. (ex. Increasing construction of new factories = capital deepening)
Capital Flight: Capital flight, in economics, occurs when assets or money rapidly flow out of a country, due to an event of economic consequence or as the result of economic globalization.
Externality: A cost or benefit from production or consumption of a product that accrues to someone other than the immediate buyers and seller of the product being produced or consumed. (ex. Positive Externality = Public education; Negative Externality = Industrial pollution). Governments attempt to adjust the cost of externalities with taxes and subsidies.
Public Goods: A good or service that is characterized by nonrivalry and non-excludability. These characteristics imply that no private firm can break even when attempting to provide such products. As a result, they’re often produced by governments and paid for with tax revenues. (ex. Military defense)
Private Goods: A good or service that is individually consumed and can be profitably produced by privately owned firms because they can exclude nonpayers from receiving the benefits. (ex. A Smartphone)
Stagflation: The simultaneous increase in the rate of unemployment and the rate of inflation. Caused by a leftward shift of the SRAS curve.
Crowding-Out: When federal spending increases, the demand for loanable funds increases. This will cause interest rates to rise in the economy; as a result, business investment will decline.
Automatic Fiscal Policy: Fiscal policy actions that do not require a new act of congress to take effect. (ex. Progressive income taxes or unemployment insurance)
Discretionary Fiscal Policy: Fiscal policy actions that do require a new act of congress to take effect. (ex. Passing a new bill to cut corporate taxes during a recession)
Budget Deficit: When Federal spending exceeds tax revenue (gov’t expenditure > gov’t revenue). The national debt is the sum of all prior year’s budget deficits.
Budget Surplus: When Federal spending is less than tax revenue (gov’t expenditure < gov’t revenue). The extra money from a budget surplus can be used to pay down existing national debt.
Balanced Budget: When Federal spending is exactly equal to tax revenue (gov’t expenditure = gov’t revenue). This is quite rare on the national level and can be disrupted by automatic fiscal policy actions (ex. progressive taxes and social safety net programs).
Non-Accelerating Inflation Rate of Unemployment (NAIRU): The unemployment rate where the inflation rate is completely stable (neither increasing nor decreasing). This is equal to the natural rate of unemployment (4-6%). When the unemployment rate falls below 4%, the rate of inflation accelerates (in the short-run); when the unemployment rate rises above 6%, the rate of inflation decelerates (in the short-run).
Short-Run Phillips Curve: A downward sloping curve that illustrates an inverse relationship between unemployment and inflation in the short run.
Long-Run Phillips Curve: A perfectly inelastic curve (at the NAIRU) that illustrates that there is no trade-off between unemployment and inflation in the long-run.
Theory of Rational Expectations: People make choices based on their rational outlook, available information, and past experiences. This suggests that the current expectations in the economy are equivalent to what people think the future state of the economy will become. This can interfere with fiscal and monetary policy. (ex. If people believe that the economy is headed for a recession, they’ll save more money and spend less. This behavior will actually hasten the onset of a recession due to lower consumer spending. In this environment, even if Congress tried to stimulate the economy by cutting taxes, people are likely to save rather than spend the tax-cut. This means that the discretionary fiscal policy will be less effective due to people’s expectations)
Counter-Cyclical Policy: Using monetary and fiscal policy tools to boost economic performance or reduce the rate of inflation in the short-run.
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