Macro Chapter 1-3

Front 1

EU-27

Back 1

Short for the European Union, consisting of 27 member countries (2013)

Front 2

The Unemployment Miracle

Back 2

A reference by the Americans to the very low unemployment rate of the European countries in the early 70's. (The miracle vanished by the late 70's though)

Front 3

EA-12

Back 3

The Euro Area (Eurozone) with its current 12 member states (2013)

Front 4

Trade deficit

Back 4

Imports > Exports

Front 5

Trade surplus

Back 5

Imports < Exports

Front 6

Trade balance

Back 6

The difference between exports and imports of a country

Front 7

The BRIC's

Back 7

The largest emerging economies in the world (2013) Brazil, Russia, India and China.
Other relevant emerging economies are South Africa, Indonesia and Mexico

Front 8

IMF

Back 8

The Internation Monetary Fund

Front 9

OECD

Back 9

Organisation for Economic Cooperation and Development

Front 10

SNA

Back 10

The System of National Accounts. A European accounting system created after WW2 in order to meassure the European economies in terms of each countries aggregate activity (aggregate output, aggregate demand, etc)

Front 11

Aggregate output

Back 11

Total output of a country- measured in GDP.

Front 12

GDP

Back 12

Gross Domestic Product - the meassure of aggregate output in a country - the economic size of that country.

Front 13

Intermediate Goods

Back 13

Goods that are sold/bought to be used in the production of other goods. Some goods can be both intermediate or final goods (for example potatoes)

Front 14

Final Goods

Back 14

The goods that are sold directly to consumers.

Front 15

Value added in GDP

Back 15

The value added by a firm is defined as the value of its production minus the value of intermediate goods used in production.

Front 16

Production side definition(s) of GDP

Back 16

"GDP is the value of the final goods and services produced in the economy during a given period" & "GDP is the sum of value added in the economy during a given period)

Front 17

Income side definition of GDP

Back 17

"GDP is the sum of incomes in the economy during a given period"

Front 18

Labour income

Back 18

The part of a firms revenue that goes to the wage of its workers

Front 19

Capital income/profit income

Back 19

The part of a firms revenue that the firm recieves itself as profit

Front 20

The labour share

Back 20

The porcentage share of a firms revenue that goes to paying its workers. Typically between 65-75% in advanced countries

Front 21

National Income, definition

Back 21

National income is equal to the sum of all purchases by all sectors in the economy, i.e. consumption, investment and public spending

Front 22

Nominal GDP

Back 22

GDP expressed in current prices. The sum of the quantities of final goods produced times their current prices.

Front 23

Real GDP

Back 23

GDP expressed in a constant price/ajusted for inflation - the price of a selected base year.

Front 24

Real GDP per capita

Back 24

The ratio of real GDP to the population of a country. Meassures the average standard of living of the country

Front 25

GDP growth

Back 25

The rate of growth in a country's GDP from year to year (or in another given period of time)

Front 26

Expansions

Back 26

A period of positive GDP growth, typically defined as two consequtive quarters (6 months)

Front 27

Recessions

Back 27

A period of negative GDP growth, typically defined as two consequtive quarters (6 months)

Front 28

Inflation

Back 28

A sustained rise in the general level of prices

Front 29

The Inflation rate

Back 29

The rate at which the price level increases over a period of time.

It can be meassured by the rate of change in either the GDP deflator or the CPI (Consumer price index) over a given period of time

Front 30

Deflation

Back 30

A sustained decline in the price level, corresponding to a negative inflation rate

Front 31

The GDP deflator

Back 31

The average price of output in an economy.

The ratio of nominal GDP to Real GDP in a given year.

The index number is set to 1 in the base year

GDP Deflator = €Y/Y

Front 32

The Consumer Price Index (CPI)

Back 32

Meassures the average price of consumption/the average price of living for consumers in an economy.

This average price is different from the GDP deflator because not all goods in GDP are sold to consumers and some of their consumed goods are imported from abroad

Front 33

Index number

Back 33

A comparative number with a set value in a chosen base year (often 100)

f.eks. if we have a price index and the base year 2005 has an index number of 100, then the value of a given consumption basket this year is 100. in 2010 the index number is 120. this means that it costs 20% more to buy the same consumption basket in this year compared to the base year.

Front 34

HCIP

Back 34

The Harmonised Index of Consumer Prices
- The European price index for consumer price inflation

set to 100 in the base year (currently 2001)

Front 35

Consumption basket

Back 35

A chosen basket of goods with a certain value. Used to meassure changes in the buying power of consumers due to inflation.

Front 36

The price level

Back 36

The average price level in an economy. can be meassured by either the GDP deflator or the CPI

Front 37

Workers' real wage

Back 37

The wage measured in terms of goods rather than in currency (what you can buy with your wage)

Front 38

pure inflation

Back 38

a proportional increase in prices and wages

Front 39

The ideal rate of inflation

Back 39

most agree it's between 1-4% per year

Front 40

Okuns law

Back 40

The relation between output growth and the change in unemployment. When output increases unemployment decreases.

Front 41

The Phillips Curve

Back 41

The relation between unemployment and inflation. Low unemployment typically leads to an increase in the inflation rate

Front 42

What determines output in the short run?

Back 42

Short run = 2-3 years. Output is primarily driven by movements in demand (consumer confidence etc.)

Front 43

What determines output in the medium run?

Back 43

Medium run = A decade. Output is driven by supply factors like capital stock, the size of the labour force and the level of technology

Front 44

What determines output in the long run?

Back 44

Long run = A few or more decades. Output depends on factors like the education system, the saving rate and the role of the government

Front 45

Consumption

Back 45

Goods and services purchased by consumers. Accounts on average for about 56 % of GDP (in the EU). Denoted with a C.

Front 46

Investment

Back 46

The sum of non-residential investments by firms and residential investments by people. Accounts on average for about 18.4 % of GDP (EU). Denoted with an I

Front 47

Non-residential investment

Back 47

The purchase by firms of capital goods like a new plant or new machines, that will yield a service in the future

Front 48

Residential investment

Back 48

The purchase by people of new houses or apartments that will yield a service in the future

Front 49

Inventory investment

Back 49

The difference between production and sales. When more goods are produced than are being sold in a year, the leftover goods (The inventories) might be sold in later years if they are durable goods that don't expire.

Front 50

Financial investment

Back 50

The purchase of gold or shares or other financial assets

Front 51

Government Spending

Back 51

The purchase of goods (aeroplanes and office equipment) and services (services provided to the public by government employees) by the national, regional and local governments. Accounts on average for about 22.5 % of GDP (EU). Denoted with a G.
OBS! Does not include Government transfers

Front 52

Government transfers

Back 52

Unemployment benefits, pensions and interest payments on the government debt. These are government expenditures but they are not a part of government spending because they are not classified as either goods or services

Front 53

Imports

Back 53

The goods and services that consumers, firms an the government buys from the rest of the world. Denoted with IM

Front 54

Exports

Back 54

The purchase of domestic goods and services by foreigners and other countries. Denoted with X

Front 55

The Trade Balance/Net Exports

Back 55

The difference between Imports and Exports (X-IM). In 2010 the EU had an average trade surplus of 0.9 % of GDP

Front 56

Trade surplus

Back 56

When exports exceed imports

Front 57

Trade deficit

Back 57

When exports are less than imports

Front 58

Demand for Goods Identity/Equation

Back 58

Z = C + I + G + X - IM or Z = c0 + c1*(Y - T) + I + G

Front 59

Closed economy

Back 59

When a country does not trade with the rest of the world

Front 60

Disposable Income

Back 60

The income that remains when consumers have recieved transfers from the government and paid taxes. Denoted with YD

YD = Y - T

Front 61

The Consumption function

Back 61

C = C(YD) or C = c0 +c1*YD
..........(+)
Meaning that consumption is a function that is positively dependent of disposable income - When disposable income increases, so does consumtion.

Front 62

Behavioral Equation

Back 62

An equation that describes an aspect of behaviour

Front 63

The propensity to consume

Back 63

The effect one additional unit of income has on consumption (f.eks: of 1 more euro in disposable income you spend 50 cent on consumption). Must always be positive and must be less than 1. Denoted c1

Front 64

C0

Back 64

In the consumption function c0 is what people would consume is their disposable income was 0. This means that people either take from their savings, sell assets or borrow money. Thus the value of c0 depends on how easy it is to borrow and how optimistic people are about the future

Front 65

Endogenous variable

Back 65

variables that are explained within a model

Front 66

Exogenous variable

Back 66

Variables that are taken as given

Front 67

Fiscal policy

Back 67

The choice of taxes and spending by the government

Front 68

Equilibrium in the goods market

Back 68

When the production of goods is equal to the demand for goods

Front 69

Production (Y) and Income (Y) are identically equal. (For explanation see the different ways of looking at GDP in chapter 2)

Back 69

JUST REMEMBER THIS ALWAYS!

Front 70

Equilibrium output equation

Back 70

Y = 1/1 - c1 * [c0 + I + G - c1*T]

Front 71

Autonomous spending

Back 71

The part of the demand for goods that doesn't depend on output (independent of output). This is captured by the second term of the Equilibrium output equation = [c0 + I + G - c1*T]

Front 72

The Multiplier

Back 72

Is captured by the first term in the Equilibrium output equation = 1/1 - c1

It is the effect by which an increase in demand (caused by an increase in any of the variables of autonomous spending) will lead to a more than proportional increase in output. So an increase in a variable like government spending will increase output by a factor that is equal to the value of the multiplier

Front 73

Balanced budget

Back 73

When taxes = Government spending

Front 74

Geometric series

Back 74

A sum of a successive rounds that approaches a limit.
The multiplier effect is a geometric series where the sum of all the sucessive increases in production, following an increase in one of the factors of autonomous spending, adds up to the value of the multiplier in the equilibium output equation.

Front 75

Dynamics of adjustment

Back 75

Captures the problem that output adjustments to changes in demand happen over time and not just right away, as simplified models/equations suggest. f.eks, a firm who faces higher demand might draw on inventories before increasing output, and a person with a higher disposable income might not increase consumption right away. How long the adjustment takes depend on how often firms revise their production.

Front 76

Saving

Back 76

The sum of private saving and public saving.

Front 77

Private saving

Back 77

Saving by consumers is equal to their disposable income minus their consumption
S = YD - C

Denoted with an S

Front 78

Public saving

Back 78

Taxes (government income) minus government spending

T - G

Front 79

Budget surplus

Back 79

When taxes are are higher than government spending

T > G

Front 80

Budget deficit

Back 80

When taxes are less than government spending

T < G

Front 81

The IS relation

Back 81

States that Investment must equal Saving
I = (Y - T - C) + (T - G)
This means that for the market to be in equilibrium firms must only invest what people and the government want to save

Front 82

The propensity to save

Back 82

Captured by the term (1 - c1) in the private saving equation. Tells how much of an additional unit of income a person will save.

Front 83

The private saving equation

Back 83

S = -c0 + (1 - c1)*(Y - T)

Front 84

The Paradox of saving

Back 84

As people try to save more at a given level of income, the income decreases by amount such that their saving is unchanged because of a negative multiplier effect. This means that output also decreases.

TSaving can however pay off in the medium and the long run, but in the short run it can lead to recession