Econ 3 Vocab

Front 1

gross domestic product (GDP)

Back 1

the market value of the final goods and services produced in a country during a given period

Front 2

final goods or services

Back 2

goods or services consumed by the ultimate user; because they are the end products of the production process, they are counted as part of GDP

Front 3

intermediate goods or services

Back 3

goods or services used up in the production of final goods and services and therefore not counted as part of GDP

Front 4

capital good

Back 4

a long-lived good that is used in the production of other goods and services (factories, houses, etc.)

Front 5

value added

Back 5

for any firm, the market value of its product or service minus the cost of inputs purchased from other firms

Front 6

consumer expenditure (consumption)

Back 6

spending by households on goods and services such as food, clothing, and entertainment

Front 7

consumer durables

Back 7

long-lived consumer goods such as cars and furniture; note that new houses are not treated as consumer durables but as part of investment

Front 8

consumer nondurables

Back 8

shorter-lived goods like food and clothing

Front 9

services

Back 9

largest single component of consumer spending, including everything from haircuts and taxi rides to legal, financial, and educational services

Front 10

investment

Back 10

spending by firms on final goods and services, primarily capital goods

Front 11

business fixed investment

Back 11

the purchase by firms of new capital goods such as machinery, factories, and office buildings; firms buy capital goods to increase their capacity to produce

Front 12

residential investment

Back 12

construction of new homes and apartment buildings

Front 13

inventory investment

Back 13

the addition of unsold goods to company inventories; i.e. the goods that a firm produces but doesn't sell during the current period are treated, for accounting purposes, as if the firm had bought those goods from itself

Front 14

government purchases

Back 14

purchases by federal, state, and local governments of final goods and services; government purchases do NOT include transfer payments, which are payments made by the government in return for which no current goods or services are received (such as unemployment benefits), nor do they include interest paid on the gov't debt

Front 15

net exports

Back 15

exports minus imports

Front 16

real GDP

Back 16

a measure of GDP in which the quantities produced are valued at the prices in a base year rather than at current prices; real GDP measures the actual physical volume of production

Front 17

nominal GDP

Back 17

a measure of GDP in which the quantities produced are valued at current-year prices; nominal GDP measures the current dollar value of production

Front 18

factors affecting well-being that are NOT a result of real GDP

Back 18

- leisure time
- nonmarket services (unpaid homemaking, etc.)
- environmental quality & resource conservation
- quality-of-life indicators

Front 19

factors affecting well-being that ARE contributed to real GDP

Back 19

- higher material standard of living
- better health
- longer life expectancy
- higher rates of literacy

Front 20

consumer price index (CPI)

Back 20

for any period, measures the cost in that period of a standard basket of goods and services relative to the cost of the same basket of goods and services in a fixed year (base year); (cost of basket at current year $) / (cost of basket at base year $)

Front 21

price index

Back 21

a measure of the average price of a given class of goods or services relative to the price of the same goods and services in a base year

Front 22

rate of inflation

Back 22

the annual percentage rate of change in the price level, as measured, for example, by the CPI

Front 23

deflation

Back 23

a situation in which the prices of most goods and services are falling over time so that inflation is negative

Front 24

nominal quantity

Back 24

a quantity that is measured in terms of its current dollar value

Front 25

real quantity

Back 25

a quantity that is measured in physical terms - for example, in terms of quantities of goods and services

Front 26

deflating (a nominal quantity)

Back 26

the process of dividing a nominal quantity by a price index (such as the CPI) to express the quantity in real terms

Front 27

real wage

Back 27

the wage paid to workers measured in terms of purchasing power; the real wage for any given period is calculated by dividing the nominal (dollar) wage by the CPI for that period

Front 28

indexing

Back 28

the practice of increasing a nominal quantity each period by an amount equal to the percentage increase in a specified price index. Indexing prevents the purchasing power of the nominal quantity from being eroded by inflation

Front 29

price level

Back 29

a measure of the overall level of prices at a particular point in time as measured by a price index such as the CPI

Front 30

relative price

Back 30

the price of a specific good or service *in comparison to* the prices of other goods and services

Front 31

bracket creep

Back 31

a situation where inflation pushes income into higher tax brackets; the result is an increase in income taxes but no increase in real purchasing power

Front 32

true costs of inflation

Back 32

- "noise" in price system; difficult for market participants to interpret information conveyed by prices
- distortions of tax system (e.g. provisions of tax code not indexed)
- shoe-leather costs
- unexpected redistributions of wealth
- interference with long-term planning

Front 33

hyperinflation

Back 33

a situation in which the inflation rate is extremely high

Front 34

real interest rate

Back 34

the annual percentage increase in the purchasing power of a financial asset; the real interest rate on any asset equals the nominal interest rate on that asset minus the inflation rate

Front 35

nominal interest rate

Back 35

the annual percentage increase in the nominal value of a financial asset

Front 36

Fisher effect

Back 36

the tendency for nominal interest rates to be high when inflation is high and low when inflation is low

Front 37

diminishing returns to labor

Back 37

if the amount of capital and other inputs in use is held constant, then the greater the quantity of labor already employed, the less each additional worker adds to production

Front 38

worker mobility

Back 38

the movement of workers between jobs, firms, and industries

Front 39

skill-biased technological change

Back 39

technological change that affects the marginal products of higher-skilled workers differently from those of lower-skilled workers

Front 40

labor force

Back 40

the total number of employed and unemployed people in the economy

Front 41

unemployment rate

Back 41

the number of unemployed people divided by the labor force

Front 42

participation rate

Back 42

the percentage of working-age population in the labor-force (that is, the percentage that is either employed or looking for work)

Front 43

unemployment spell

Back 43

a period during which an individual is continuously unemployed

Front 44

duration

Back 44

the length of an unemployment spell

Front 45

discouraged workers

Back 45

people who say they would like to have a job but have not made an effort to find one in the past four weeks

Front 46

frictional unemployment

Back 46

the short-term unemployment associated with the process of matching workers with jobs

Front 47

structural unemployment

Back 47

the long-term and chronic unemployment that exists even when the economy is producing at a normal rate

Front 48

cyclical unemployment

Back 48

the extra unemployment that occurs during periods of recession

Front 49

compound interest

Back 49

the payment of interest not only on the original deposit but on all previously accumulated interest

Front 50

average labor productivity

Back 50

output per employed worker

Front 51

diminishing returns to capital

Back 51

if the amount of labor and other inputs employed is held constant, then the greater the amount of capital already in use, the less an additional unit of capital adds to production

Front 52

entrepreneurs

Back 52

people who create new economic enterprises

Front 53

human capital

Back 53

an amalgam of factors such as education, training, experience, intelligence, energy, work habits, trustworthiness, initiative, and others that affect the value of a worker's marginal product

Front 54

saving

Back 54

current income minus spending on current needs

Front 55

saving rate

Back 55

saving divided by income

Front 56

wealth

Back 56

the value of assets minus liabilities

Front 57

assets

Back 57

anything of value that one *owns*

Front 58

liabilities

Back 58

the debts one *owes*

Front 59

balance sheet

Back 59

a list of an economic unit's assets and liabilities on specific date

Front 60

flow

Back 60

a measure that is defined *per unit of time*

Front 61

stock

Back 61

a measure that is defined *at a point in time*

Front 62

capital gains

Back 62

increases in the value of existing assets

Front 63

capital losses

Back 63

decreases in the value of existing assets

Front 64

national saving

Back 64

the saving of the entire economy, equal to GDP less consumption expenditures and government purchases of goods and services, or Y-C-G

Front 65

transfer payments

Back 65

payments the gov't makes to the public for which it receives no current goods or services in return

Front 66

private saving

Back 66

the saving of the private sector of the economy is equal to the after-tax income of the private sector minus consumption expenditures (Y - T - C); private saving can be further broken down into household saving and business saving

Front 67

public saving

Back 67

the saving of the gov't sector is equal to net tax payments minus gov't purchases (T - G)

Front 68

government budget surplus

Back 68

the excess of gov't tax collections over gov't spending (T - G); the gov't budget surplus equals public saving

Front 69

government budget deficit

Back 69

the excess of gov't spending over tax collections (G - T)

Front 70

life-cycle saving

Back 70

saving to meet long-term objectives such as retirement, college attendance, ofr the purchase of a home

Front 71

precautionary saving

Back 71

saving for protection against unexpected setbacks such as the loss of a job or a medical emergency

Front 72

bequest saving

Back 72

saving done for the purpose of leaving an inheritance

Front 73

financial intermediaries

Back 73

firms that extend credit to borrowers using funds raised from savers

Front 74

bond

Back 74

a legal promise to repay a debt, usually including both the principal amount and regular interest payments

Front 75

principal amount

Back 75

the amount originally lent

Front 76

maturation date

Back 76

the date at which the principal will be repaid

Front 77

coupon payments

Back 77

regular interest payments made to the bondholder

Front 78

coupon rate

Back 78

the interest rate promised when a bond is issued; the annual coupon payments are equal to the coupon rate times the principal amount of the bond

Front 79

stock (or equity)

Back 79

a claim to partial ownership of a firm

Front 80

dividend

Back 80

a regular payment received by stockholders for each share that they own

Front 81

risk premium

Back 81

the rate of return that financial investors require to hold risky assets minus the rate of return on safe assets

Front 82

diversification

Back 82

the practice of spreading one's wealth over a variety of different financial investments to reduce overall risk

Front 83

mutual fund

Back 83

a financial intermediary that sells shares in itself to the public, then uses the funds raised to buy a wide variety of financial assets

Front 84

money

Back 84

any asset that can be used in making purchases

Front 85

medium of exchange

Back 85

an asset used in purchasing goods and services

Front 86

barter

Back 86

the direct trade of goods or services for other goods or services

Front 87

unit of account

Back 87

a basic measure of economic value

Front 88

store of value

Back 88

an asset that serves as a means of holding wealth

Front 89

M1

Back 89

sum of currency outstanding and balances held in checking accounts

Front 90

M2

Back 90

All the assets in M1 plus some additional assets that are usable in making payments but at greater cost or inconvenience than currency or checks

Front 91

bank reserves

Back 91

cash or similar assets held by commercial banks for the purpose of meeting depositor withdrawals and payments

Front 92

100 percent reserve banking

Back 92

a situation in which banks' reserves equal 100 percent of their deposits

Front 93

reserve-deposit ratio

Back 93

bank reserves divided by deposits

Front 94

fractional-reserve banking system

Back 94

a banking system in which bank reserves are less than deposits so that the reserve-deposit ratio is less than 100%

Front 95

open-market purchase

Back 95

the purchase of gov't bonds from the public by the Fed for the purpose of increasing the supply of bank reserves and the money supply

Front 96

open-market sale

Back 96

the sale by the Fed of gov't bonds to the public for the purpose of reducing bank reserves and the money supply

Front 97

open-market operations

Back 97

open-market purchases and open-market sales

Front 98

velocity

Back 98

a measure of the speed at which money changes hands in transactions involving final goods and services, or, equivalently, nominal GDP divided by the stock of money.
V = (P X Y) / M, where V is velocity, P X Y is nominal GDP, and M is the money supply whose velocity is being measured

Front 99

quantity equation

Back 99

money times velocity equals nominal GDP; M x V = P x Y

Front 100

recession (or contraction)

Back 100

a period in which the economy is growing at a rate significantly below normal

Front 101

depression

Back 101

a particularly severe or protracted recession

Front 102

peak

Back 102

the beginning of a recession; the high point of economic activity prior to a downturn

Front 103

trough

Back 103

the end of a recession; the low point of the economic activity prior to a recovery

Front 104

expansion

Back 104

a period in which the economy is growing at a rate significantly above normal

Front 105

boom

Back 105

a particularly strong and protracted expansion

Front 106

potential output, Y* (or potential GDP or full-employment output)

Back 106

the maximum sustainable amount of output (real GDP) that an economy can produce

Front 107

output gap, Y - Y*

Back 107

the difference between the economy's actual output and its potential output at a point in time

Front 108

recessionary gap

Back 108

a negative output gap, which occurs when potential output exceeds actual output (Y < Y*)

Front 109

expansionary gap

Back 109

a positive output gap, which occurs when actual output is higher than potential output (Y > Y*)

Front 110

natural rate of unemployment, u*

Back 110

the part of the total unemployment rate that is attributable to frictional and structural unemployment; equivalently, the unemployment rate that prevails when cyclical unemployment is zero, so that the economy has neither a recessionary nor an expansionary output gap

Front 111

Okun's law

Back 111

each extra percentage point of cyclical unemployment is associated with about a 2 percentage point increase increase in the output gap, measured in relation to potential output

Front 112

menu costs

Back 112

the costs of changing prices

Front 113

planned aggregate expenditure (PAE)

Back 113

total planned spending on final goods and services

Front 114

consumption function

Back 114

the relationship between consumption spending and its determinants, in particular, disposable income

Front 115

autonomous consumption

Back 115

consumption spending that is not related to the level of disposable income

Front 116

wealth effect

Back 116

the tendency of changes in asset prices to affect households' wealth and thus their consumption spending

Front 117

Marginal propensity to consume (mpc)

Back 117

the amount by which consumption rises when disposable income rises by $1; we assume that 0 < mpc < 1

Front 118

autonomous expenditure

Back 118

the portion of planned aggregate expenditure that is independent of output

Front 119

induced expenditure

Back 119

the portion of planned aggregate expenditure that depends on output Y

Front 120

expenditure line

Back 120

a line showing the relationship between planned aggregate expenditure and the output

Front 121

short-run equilibrium output

Back 121

the level of output at which output Y equals planned aggregate expenditure PAE; short-run equilibrium output is the level of output that prevails during the period in which prices are predetermined

Front 122

income-expenditure multiplier

Back 122

the effect of a one-unit increase in autonomous expenditure on short-run equilibrium output; for example, a multiplier of 5 means that a 10-unit decrease in autonomous expenditure reduces short-run equilibrium output by 50 units

Front 123

stabilization policies

Back 123

gov't policies that are used to affect planned aggregate expenditure, with the objective of eliminating output gaps

Front 124

expansionary policies

Back 124

gov't policy actions intended to increase planned spending and output

Front 125

contractionary policies

Back 125

gov't policy actions designed to reduce planned spending and output

Front 126

automatic stabilizers

Back 126

provisions in the law that imply automatic increases in gov't spending or decreases in taxes when real output declines

Front 127

Board of Governors

Back 127

the leadership of the Fed, consisting of 7 governors appointed by the president to staggered 14-year terms

Front 128

Federal Open Market Committee (or FOMC)

Back 128

the committee that makes decision concerning monetary policy

Front 129

banking panic

Back 129

a situation in which news or rumors of the imminent bankruptcy of one or more banks leads bank depositors to rush to withdraw their funds

Front 130

deposit insurance

Back 130

a system under which the government guarantees that depositors will not lose any money even if their bank goes bankrupt

Front 131

federal funds rate

Back 131

the interest rate that commercial banks charge each other for very short-term (usually overnight) loans; because the Fed frequently sets its policy in terms of the federal funds rate, this rate is closely watched in financial markets

Front 132

monetary policy rule

Back 132

describes how a central bank takes action in response to changes in the state of the economy

Front 133

target inflation rate

Back 133

the Fed's long-run for inflation

Front 134

target real interest rate

Back 134

the Fed's long-run goal for the real interest rate

Front 135

portfolio allocation decision

Back 135

the decision about the forms in which to hold one's wealth

Front 136

demand for money

Back 136

the amount of wealth an individual chooses to hold in the form of money

Front 137

money demand curve

Back 137

shows the relationship between the aaggregate quantity of money demanded M and the nominal interest rate i; because an increase in the nominal interest rate increases the opportunity cost of holding money, which reduces the quantity of money demanded, the money demand curve slopes down

Front 138

discount window lending

Back 138

the lending of reserves by the Fed to commercial banks

Front 139

discount rate

Back 139

(also known as the primary credit rate) the interest rate that the Fed charges commercial banks to borrow reserves

Front 140

reserve requirements

Back 140

set by the Fed, the min. values of the ratio of bank deposits that commercial banks are allowed to maintain