Econ Study Guide

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Term

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Definition

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consumption of fixed capital

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an estimate of the amount of capital worn out or used up (consumer) in producing the gross domestic product; also called depreciation

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disposable income (DI)

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personal income less personal taxes; income available for personal consumption expenditures and personal saving

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expenditures approach

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the method that adds all expenditure made for final g and s to measure the gdp

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final goods and services

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g and s that have been purchased for final use and not for resale or further processing or manufacturing

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GDP

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the total market value of all final goods and services produced annually within the boundaries of the united states, whether by US- or foreign-supplied resources

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gross private domestic investment

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(Ig) expenditures for newly produced capital goods (such as machinery, equipment, tools, and buildings) and for additions to inventories

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government purchases (G)

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expenditures by government for g and s that government consumes in providing public goods and for public (or social) capital that has as long lifetime; the expenditure of all governments in the economy for those final g and s.

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income approach

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the method that adds all the income generated by the production of final g and s to measure the GDP

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intermediate goods

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products that are purchased for resale or further processing or manufacturing

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multiple counting

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wrongly including the value of intermediate goods in the GDP; counting the same g or s more than once

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national income accounting

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the techniques used to measure the overall production of the economy and other related variables for the nation as a whole

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national income

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total income earned by resource suppliers for their contributions to GDP plus taxes on production and imports; the sum of wages and salaries, rent, interest, profit, proprietors' income, and such taxes.

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net domestic product (NDP)

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GDP less the part of the year's output that is needed to replace the capital goods worn out in producing the output; the nation's total output available for consumption or additions to the capital stock

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net exports (Xn)

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exports minus imports

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net private domestic investment

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GDP investment less consumption of fixed capital; the addition to the nation's stock of capital during a year

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nominal GDP

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the GDP measured in terms of the price level at the time of measurement (unadjusted for inflation)

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personal consumption expenditures (C)

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the expenditures of households for durable and nondurable consumer g and s

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personal income (PI)

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the earned and unearned income available to resource suppliers and others before the payment of personal taxes

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price index

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an index number that shows how the weighted average price of a "market basket" of goods changes over time

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real GDP

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GDP adjusted for inflation; GDP in a year divided by the GDP price index for that year, the index expressed as a decimal

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taxes on production and imports

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a national income accounting category that includes such taxes as sales , excise, business property taxes, and tariffs which firms treat as costs of producing a product and pass on (in whole or in part) to buyers by charging a higher price.

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value added

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the value of product sold by a firm less the value of the products (materials) purchased and used by the firm to produce the product

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anticipated inflation

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Increases in the price level (inflation) that occur at the expected rate

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business cycles

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recurring increases and decreases in the level of economic activity over periods of years; consists of peak, recession, trough, and expansion phases

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Consumer Price Index (CPI)

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an index that measures the prices of a fixed "market basket" of some 300 goods and services bought by a "typical" consumer

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cost-of-living adjustments (COLAs)

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an automatic increase in the incomes (wages) of workers when inflation occurs; guaranteed by a collective bargaining contract between firms and workers

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cost-push inflation

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increases in the price level (inflation) resulting from an increase in resource costs (for example, raw-material prices) and hence in per-unit production costs; inflation caused by reductions in AS.

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cyclical unemployment

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a type of unemployment caused by insufficient total spending (or by insufficient AD)

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deflation

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a decline in the economy's price level

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demand-pull inflation

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increases in the price level (inflation) resulting from an excess of demand over output at the existing price level, caused by an increase in AD

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discouraged workers

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employees who have left the labor force because they have not been able to find employment

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economic growth

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1) an outward shift in the production possibilities curve that results from an increase in resource supplies or quality or an improvement in technology; 2) an increase of real output (GDP) or real output per capita

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expansion

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a phase of the business cycle in which the real GDP, income, and employment rise

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frictional unemployment

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a type of unemployment caused by workers voluntarily changing jobs and by temporary layoffs; unemployed workers between jobs

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full-employment rate of unemployment

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the unee rate at which there is no cyclical unee of the labor force; equal to between 4 and 5 percent in the US because some frictional and structural unee is unavoidable.

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GDP gap

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actual GDP minus potential outputs; may positive or negative (+ / - GDP gap)

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hyperinflation

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a very rapid rise in the price level; an extremely high rate of inflation

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inflation

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a rise in the general level of prices in an economy

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labor force

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persons 16 years of age and older who are not in institutions and who are employed or are unemployed and seeking work

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natural rate of unemployment (NRU)

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the full-employment unee rate; the unee rate occurring when there is no cyclical unemployment and the economy is achieving its potential output; the unee rate at which actual inflation equals expected inflation

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nominal income

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the number of dollars received by an individual or group for its resources during some period of time.

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nominal interest rate

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the interest rate expressed in terms of annual amounts currently charged for interest and not adjusted for inflation

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Okun's law

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the generalization that for any 1-percentage-point rise in the unemployment rate above the full-employment unee rate will increase the GDP gap by 2 percent of the potential output (GDP) of the economy

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peak

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the point in a business cycle at which business activity has reached a temporary maximum; the economy is near or at full employment and the level of real output is at or very close to the economy's capacity

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per-unit production costs

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the average production cost of a particular level of output; total input cost divided by units of output

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potential output

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the real output (GDP) an economy can produce when it fully employs its available resources

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productivity

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a measure of average output or real output per unit of input. For example, the productivity of labor is determined by dividing real output by hours of work

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real GDP per capita

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inflation-adjusted output per person; real GDP / population

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real income

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the amount of g and s that can be purchased with nominal income during some period of time, nominal income adjusted for inflation

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real interest rate

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the interest rate expressed in dollars of constant value (adjusted for inflation) and equal to the nominal interest rate less the expected rate of inflation.

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recession

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a period of declining real GDP, accompanied by lower real income and higher unee.

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rule of 70

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a method for determining the number of years it will take for some measure to double, given its annual percentage increase. Example: to determining the number of years it will take for the price level to double, divide 70 by the annual rate of inflation

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structural unemployment

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unee of workers whose skills are not demanded by employers, who lack sufficient skill to obtain employment, or who cannot easily move to location where jobs are available.

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trough

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unanticipated inflation

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increases in the price level (inflation) at a rate greater than expected

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unemployment rate

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the percentage of the labor force unemployed at any time

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45 degree line

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147-148(consumption); 148-149(saving)

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average propensity to consume (APC)

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Fraction (or percentage) of disposable income that households plan to spend for consumer goods and services; consumption divided by disposable income

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average propensity to save (APS)

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Fraction (or percentage) of disposable income that households save; saving divided by disposable income

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break-even income

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The level of disposable income at which households plan to consume (spend) all their income and to save none of it; also, in a income transfer program, the level of earned income at which subsidy payments become zero.

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consumption schedule

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a schedule showing the amounts households plan to spend for consumer goods at different levels of disposable income

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expected rate of return

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the increase in profit a firm anticipates it will obtain by purchasing capital (or engaging in r & d); expressed as percentage of the total cost of the investment (or R&D) activity.

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investment demand curve

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a curve that shows the amounts of investment demanded by an economy at a series of real interest rates

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marginal propensity to consume (MPC)

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the fraction of any change in disposable income spent for consumer goods; equal to the change in consumption divided by the change in disposable income

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marginal propensity to save (MPS)

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the fraction of any change in disposable income that households save; equal to the change in saving divided by the change in the disposable income

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multiplier

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the ratio of a change in the equilibrium GDP to the change in investment or in any other component of aggregate expenditures or aggregate demand; the number by which a change in any such component must be multiplied to find the resulting change in equilibrium GDP.

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saving schedule

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a schedule that shows the amounts households plan to save (plan not to spend for consumer goods), at different levels of disposable income.

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wealth effect

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the tendency for people to increase their consumption spending when the value of their financial and real assets rises and to decrease their consumption spending when the value of those assets falls

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aggregate demand-aggregate supply (AD-AS) model

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the macroeconomic model that uses aggregate demand and aggregate supply to determine and explain the price level and the real domestic output

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aggregate demand

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a schedule or curve that shows the total quantity of goods and services demanded (purchased) at different price levels

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aggregate supply

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a schedule or curve showing the total quantity of goods and services supplied (produced) at different price levels

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determinants of aggregate demand

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Factors such as consumption spending, investment, government spending, and net exports that, if they change, shift the aggregate demand curve

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determinants of aggregate supply

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factors such as input prices, productivity, and the legal-institutional environment that, if they change, shift the AS curve

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efficiency wages

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a wage that minimizes wage costs per unit of output by encouraging greater effort or reducing turnover

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equilibrium price level

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the price level at which the AD curve intersects the AS curve

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equilibrium real output

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(see equilibrium real domestic output) -- the GDP at which the total quantity of final g and s purchases (aggregate expenditures) is equal to the total quantity of final g and s produced (the real domestic outputs); the real domestic output at which the AD curve intersects the AS curve

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foreign purchases effect

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the inverse relationship between the net exports of an economy and its price level relative to foreign price levels

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interest-rate effect

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the tendency for increases in the price level to increase the demand for money, raise interest rates, and, as a result, reduce total spending and real output in the economy (and the reverse for price-level decreases)

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long-run aggregate supply curve

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the AS curve associated with a time period in which input prices (especially nominal wages) are fully responsive to changes in the price level

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menu costs

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the reluctance of firms to cut prices during recessions (they they think will be short lived) because of the costs of altering and communicating their price reductions; named after the cost associated with printing new menus at restaurants

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productivity

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a measure of average output or real output per unit of input. For example, the productivity of labor is determined by dividing real output by hours of work

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real-balances effect

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the tendency for increases in the price level to lower the real value (or purchasing power) of financial assets with fixed money value and, as a result, to reduce total spending and real output, and conversely for decreases in the price level

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short-run aggregate supply curve

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an AS curve relevant to a time period in which input prices (particularly nominal wages) do not change in response to changes in the price level

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budget deficit

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The amount by which the expenditures of the Federal government exceed its revenues in any year

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budget surplus

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the amount by which the revenues of the federal government exceed its expenditures in any year

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built-in stabilizer

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a mechanism that increases government's budge deficit (or reduces its surplus) during a recession and increases government's budge surplus (or reduces its deficit) during an expansion without any action by policy makers. The tax system is one such mechanism.

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contractionary fiscal policy

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a decrease in government purchases for goods and services, an increase in net taxes, or some combination of the two, for the purpose of decreasing AD and thus controlling inflation

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Council of Economic Advisers (CEA)

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a group of three persons that advises and assists the president of the US on economic matters (including the preparation of the annual Economic Report of the President)

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crowding-out effect

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a rise in interest rates and a resulting decrease in planned investment caused by the federal government's increased borrowing to finance budge deficits and refinance debt

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cyclical deficit

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a federal budget deficit that is caused by a recession and the consequent decline in tax revenues

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expansionary fiscal policy

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an increase in government purchases of g and s, a decrease in net taxes, or some combination of the two for the purpose of increasing AD and expanding real output

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external public debt

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the portion of the public debt owed to foreign citizens, firms, and institutions

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fiscal policy

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changes in government spending and tax collections designed to achieve a full-employment and no inflationary domestic output; also called discretionary fiscal policy

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public debt

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the total amount owed by the federal government to the owners of government securities; equal to the sum of past government budget deficits less government budget surpluses

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political business cycle

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the alleged tendency of Congress to destabilize the economy by reducing taxes and increasing government expenditure before elections and to raise taxes and lower expenditures after elections

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progressive tax system

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a tax whose average tax rate increases as the taxpayer's income increases and decreases as the taxpayer's income decreases

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proportional tax system

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a tax whose average tax rate remains constant as the taxpayer's income increases or decreases

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public investments

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government expenditures on public capital (such as roads, highways, bridges, mass-transit systems, and electric power facilities) and on human capital (such as education, training, and health).

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regressive tax system

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a tax whose average tax rate decreases as the taxpayer's income increases and increases as the taxpayer's income decreases

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standardized budget

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a comparison of the government expenditures and tax collections that would occur if the economy operated at full employment throughout the year; the full-employment budget

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U.S. securities

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US treasury bills, notes, and bonds used to finance budget deficits; the components of the public debt