Econ 104 Ch 5-8

Front 1

microeconomics

Back 1

examines the functioning of individual industries and the behavior of individual decision-making units - households and firms

Front 2

macroeconomics

Back 2

deals with the economy as a whole, focuses on the determinants of total national income, deals with aggregates such as aggregate consumption and investment, and looks at the overall level of prices instead of individual prices, also concerned w/ households & firms

Front 3

Firms vs. Households

Back 3

Firms maximize profits

households maximize utility

Front 4

aggregate

Back 4

refers to sums

Front 5

aggregate behavior

Back 5

the behavior of all households and firms together

Front 6

sticky prices

Back 6

prices that do not always adjust rapidly to maintain equality between quantity supplied and quantity demanded

Front 7

3 Main Concerns of Macroeconomics

Back 7

Output growth, unemployment, inflation/deflation

Front 8

business cycle

Back 8

the cycle of short-term ups and downs in the economy

Front 9

aggregate output

Back 9

the total quantity of goods and services produced in an economy in a given period

Front 10

recession

Back 10

a period during which aggregate output declines, usually for 2 consecutive quarters

Front 11

depression

Back 11

a prolonged and deep recession

Front 12

unemployment rate

Back 12

the percentage of the labor force that is unemployed

Front 13

inflation

Back 13

an increase in the overall price level

Front 14

hyperinflation

Back 14

periods of very rapid increases in the overall price level (rare)

Front 15

deflation

Back 15

a decrease in the overall price level

Front 16

The Components of the Macroeconomy

Back 16

1) Households - private sector

2) Firms - private sector

3) Govt.- public sector

4) Rest of the World - foreign sector

Front 17

circular flow diagram

Back 17

a diagram showing the income received and payments made by each sector of the economy

Front 18

transfer payments

Back 18

cash payments made by the govt to people who do not supply goods, services, or labor in exchange for these payments (social security benefits and welfare payments)

Front 19

The 3 Market Arenas

Back 19

Goods and Services Market

Labor Market

Money/Financial Market

Front 20

treasury bonds, notes, and bills

Back 20

promissory notes issued by the federal govt. when it borrows money

Front 21

corporate bonds

Back 21

promissory notes issued by firms when they borrow money

Front 22

share of stock

Back 22

financial instruments that give to the holder a share in the firm's ownership and therefore the right to share in the firm's profits

Front 23

dividends

Back 23

the portion of a firm's profits that the firm pays out each period to its shareholders

Front 24

fiscal policy

Back 24

govt. policies concerning taxes and spending

Front 25

monetary policy

Back 25

tools used by the Federal Reserve to control the short term interest rate

Front 26

John Maynard Keynes

Back 26

-suggested that the level of aggregate demand for goods and services determines the level of employment

-he believed the govt. should intervene more

Front 27

Employment Act of 1946

Back 27

-made it so the president would be advised of all economic issues

-committed fed. govt. to intervening in the economy to prevent large declines in output and employment

Front 28

stagflation

Back 28

a situation of both high inflation and high unemployent

Front 29

National Income and Product Accounts

Back 29

data collected and published by the govt. describing the various components of national income and output in the economy

(convey date about the performance of the economy, but also show how the economy pieces together)

Front 30

Gross Domestic Product

Back 30

GDP - key concept in the national income and product accounts, it is the total market value of all final goods and services produced within a given period by factors of production located within a country

-only concerned with new/current production

Front 31

intermediate goods

Back 31

goods that are produced by one firm for use in further processing by another firm

Front 32

value added

Back 32

the difference between the value of goods as the leave a stage of production and the cost of the goods as they entered the stage

Front 33

3 basic factors of production

Back 33

land labor capital

Front 34

Gross National Product

Back 34

GNP- the total market value of all final goods and services produced within a given period by factors of production owned by a country's citizens, regardless of where the output is produced

Front 35

expenditure approach

Back 35

method of computing GDP that measures the total amount spent on all final goods and services during a given period

Front 36

income approach

Back 36

measures the income (wages, rents, interest, and profits) received by all factors of production in producing final goods and services

Front 37

durable goods

Back 37

goods that last a relatively long time (cars and household appliances)

Front 38

nondurable goods

Back 38

goods that are used up fairly quickly (food and clothing)

Front 39

services

Back 39

the things we buy that don't involve the production of physical things (legal services, medical services, education)

Front 40

C

Back 40

Personal Consumption Expenditures

expenditures by consumers on goods and services

Front 41

I

Back 41

Gross Private Domestic Investment

total investment in capital- that is, the purchase of new housing, plants, equipment, and inventory by the private (non-govt.) sector

Front 42

G

Back 42

Government Consumption & Gross Investment

expenditures by federal, state, and local govts. for final goods and services

Front 43

nonresidential investment

Back 43

expenditures by firms for machines, tools, plants, etc.

Front 44

residential investment

Back 44

expenditures by households and firms on new houses and apartments

Front 45

change in business inventories

Back 45

the amount by which firms inventories change during a period (inventories are the goods that firms produce now, but intend to sell later)

Front 46

depreciation

Back 46

the amount by which an asset's value falls in a given period

Front 47

gross investment

Back 47

the total value of all newly produced capital goods (plant, equipment, housing, and inventory)

Front 48

net investment

Back 48

gross investment minus depreciation

Front 49

net exports

Back 49

difference between exports & imports

Front 50

national income

Back 50

total income earned by the factors of production owned by a country's citizens

Front 51

compensation of employees

Back 51

wages, salaries, and various supplements paid to households by firms and the govermnet

Front 52

proprietor's income

Back 52

the income of unincorporated businesses

Front 53

rental income

Back 53

the income received by property owners in the form of rent

Front 54

corporate profits

Back 54

the income of corporations

Front 55

net interest

Back 55

interest paid by businesses

Front 56

indirect taxes minus subsidies

Back 56

sales taxes, customs duties, and license fees less subsidies that the govt pays for which it receives no goods or services in return

Front 57

net business transfer payments

Back 57

net transfer payments by businesses to others

Front 58

surplus of government enterprise

Back 58

income of govt. enterprises

Front 59

Net National Product

Back 59

NNP-

GDP- depreciation ; a nation's total product minus what is required to maintain the value of its capital stock

Front 60

statistical discrepency

Back 60

data measurement error

Front 61

personal income

Back 61

the total income of households

Front 62

disposable personal income/after-tax income

Back 62

(personal income- personal income taxes)

-the amount that households have to save or spend as they want

Front 63

personal saving

Back 63

amount of disposable income that is left after total personal spending in a given period

Front 64

personal saving rate

Back 64

percentage of disposable personal income that is saved

Front 65

Nominal GDP

Back 65

GDP measured in current dollars (the current prices we pay)

Nominal GDP adjusted for price changes is called Real GDP

Front 66

informal economy

Back 66

unreported transactions and income that goes unreported, so it is not counted in GDP

Front 67

Gross National Income

Back 67

GNP converted into money ($) using an average of currency exchange rates over several years adjusted for rates of inflation

Front 68

Limitations of GDP

Back 68

-ignores social aspects

-doesn't specify what goods are made

-or how income is distributed across a population

-also ignores many transactions of the informal economy

Front 69

price deflator

Back 69

percent change in the GDP deflator is a measure of the inflation (GDP deflator is a measure of overall price-level)

Front 70

labor force

Back 70

number of people employed + number of unemployed

Front 71

employed

Back 71

16+ years old, works for pay, works w/o pay for 15+ hrs/wk in family enterprise, who has a job but is temporarily w/o pay

Front 72

unemployed

Back 72

a person 16+ who is not working, is available to work and has made specific efforts to find work during the previous 4 weeks

Front 73

not in the labor force

Back 73

a person who is not looking for work because they don't want a job or they gave up looking

Front 74

unemployment rate

Back 74

ratio of the number of people unemployed to the total number of people in the labor force

-key measure of how the economy is doing

-# of unemployed/ employed + unemployed

Front 75

labor force participation rate

Back 75

ratio of labor force to total population 16+ years old

Front 76

discouraged-worker effect

Back 76

the decline in the measured unemployment rate that results when people who want tot work but cannot find job grow discouraged and stop looking, thus dropping out of the ranks of the unemployed and the labor force

Front 77

Employment Act of 1946

Back 77

Congress declared it was the responsibility of the govt. to use all means they could to promote maximum employment, production, and purchasing power

Front 78

3 Types of Unemployment

Back 78

Frictional, Structural, Cyclical

Front 79

Frictional Unemployment

Back 79

due to the normal turnover in the labor market, used to denote short-run job, skill-matching problems, (unemployment is inevitable; there is always a job-seeker somewhere)

Front 80

Structural Unemployment

Back 80

due to changes in structure of the economy that results in significant job loss in some industries

Front 81

Cyclical

Back 81

above frictional plus structural

Front 82

natural rate of unemployment

Back 82

occurs as a normal part of the functioning economy (sum of the fricitional + structural rate)

Front 83

CPI

Back 83

Consumer Price Index- announced monthly by the Bureau of Labor Statistics (BLS); meant to represent the "market basket" purchased monthly by the typical urban consumer

Front 84

CPI Market Basket

Back 84

Shows how a typical consumer divides their money among various goods and services

Front 85

producer price indexes (PPIs)

Back 85

measures of prices that producers receive for products at various stages of the production process (finished goods, intermediate materials, and crude materials)

-they detect price increases early on

Front 86

real interest rate

Back 86

difference between the interest rate on a loan and the inflation rate

Front 87

anticipated inflation

Back 87

doesn't affect the distribution of income as much as unanticipated does

Front 88

output growth

Back 88

growth rate of output of economy

Front 89

per-capita output growth

Back 89

growth rate of output per person in the economy

Front 90

productivity growth

Back 90

growth rate of output per worker

Front 91

Output Growth depends on:

Back 91

1) growth rate of capital stock

2) growth rate per unit of the capital stock

3) growth rate of labor

4) growth rate per unit of labor

Front 92

aggregate output

Back 92

the total quantity of goods and services produced or supplied in an economy in a given period

Front 93

aggregate income

Back 93

the total income received by all factors of production in a given period

-in any given period, there is an exact equality between aggregate output and income (shown in the combined term, Y)

Front 94

The Keynesian Theory of Consumption

Back 94

-consumption rises with income

-Keynes recognized that many factors (wealth and interest rates) affect consumption levels, but he focused on income

-rise in consumption will be less than rise in income

Front 95

Consumption Function

Back 95

relationship between consumption and income

C= a + bY

a= y-intercept

b= slope

Front 96

Marginal Propensity to Consume (MPC)

Back 96

The fraction of a change in income that is consumed, or spent

(it is the slope of the consumption function)

change in C/ change in Y

Front 97

Aggregate Savings

Back 97

the difference between aggregate income and aggregate consumption (so, the part of the aggregate income that is not consumed)

S=Y-C

Front 98

identity

Back 98

something that always is true

Front 99

Marginal Propensity to Save (MPS)

Back 99

The fraction of a change in income that is saved

MPC+MPS=1

Front 100

Planned investment

Back 100

those additions to capital stock and inventory that are planned by firms

Front 101

actual investment

Back 101

the actual amount of investment that takes place, it includes items such as unplanned changes in inventories

Front 102

equilibirum

Back 102

occurs when there is no tendency for change. in the macroeconomic goods market, equilibrium occurs when planned aggregate expenditure is equal to aggregate output

Front 103

planned aggregate expenditure

Back 103

the total amount the economy plans to spend in a given period (AE=C+I)

the economy is defined to be in equilibrium with aggregate output=aggregate expenditure, so Y=AE, so Y=C+I

Front 104

The Multiplier

Back 104

the ratio of the change in the equilibrium level of output to a change in some exogenous variable

Front 105

exogenous variable

Back 105

variable that is assumed not to depend on the state of the economy- that is, it does not change when the economy changes

ex: planned investment

1/MPS or 1/1-MPC