Macroeconomics

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Microeconomics

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The study of how households and firms make decisions and how they interact in markets.

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Macroeconomics

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The study of economy-wide phenomena including inflation, unemployment, and economic growth.

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GDP

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The market value of all final goods and services produced within a country in a given period of time.

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Consumption

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Spending by households on goods and services, with the exception of purchases of new housing.

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Investment

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Spending on capital equipment, inventories, and structures, including household purchases of new housing.

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Government Purchases

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Spending on goods and services by local, state and federal governments.

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Net Exports

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Exports minus Imports

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Nominal GDP

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The production of goods and services valued at current prices

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Real GDP

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The production of goods and services valued at constant prices.

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GDP deflator

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A measure of the price level calculated as the ratio of nominal GDP to real GDP times 100.

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CPI (consumer price index)

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a measure of the overall cost of the goods and services bought by the typical consumer.

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Inflation Rate

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the percentage change in the price index from the preceding period.

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Producer Price Index

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a measure of the cost of a basket of goods and services bought by firms.

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Nominal Interest Rate

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the interest rate as usually reported, not corrected for inflation.

(How fast the dollar value in your bank is rising over time)

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Real interest rate

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The interest rate corrected for the effects of inflation.

(How fast your purchasing power is rising over time)

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Indexation

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The automatic correction of a dollar amount for the effects of inflation by law or contract.

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Productivity

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The quantity of goods and services produced from each unit of labor input.

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Physical Capital

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The stock of equipment and structures that are used to produce the goods and services.

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Human Capital

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The knowledge and skills that workers acquire through education, training and experience. Also includes health.

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Natural Resources

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The inputs into the production of goods and services that are provided by nature, such as land, rivers, and mineral deposits.

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Technological Knowledge

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Society's understanding of the best ways to produce goods and services.

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Diminishing Returns

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The property whereby the benefit from an extra unit of an input declines as the quantity of the input increases.

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Catch-up Effect

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The property whereby countries that start off poor tend to grow more rapidly than countries that start off rich.

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Financial System

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The group of institutions in the economy that help to match one person's saving with another person's investment.

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Financial Markets

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Financial institutions through which savers can directly provide funds to borrowers.

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Bond

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A certificate of indebtedness

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Stock

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A claim to partial ownership in a firm.

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Financial Intermediaries

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Financial institutions through which savers can indirectly provide fund to borrowers. (banks)

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Mutual Fund

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An institution that sells shares to the public and uses the proceeds to buy a portfolio of stocks and bonds.

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National saving (saving)

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The total income in the economy that remains after paying for consumption and government purchases.

(S=I in closed economy).

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Private Saving

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The income that households have left after paying for taxes and consumption.

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Public Saving

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The tax revenue that the government has left after paying for its spending.

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Budget Surplus

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An excess of tax revenue over government spending.

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Budget Deficit

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A shortfall of tax revenue from government spending.

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Market for Loanable Funds

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The market in which those who want to save supply funds and those who want to borrow to invest demand funds.

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Crowding out

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a decrease in investment that results from government borrowing.

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Finance

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The field that studies how people make decisions regarding the allocation of resources over time and the handling of risk

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Present Value

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The amount of money today that would be needed, using prevailing interest rates, to produce a given amount of future money.

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Future value

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The amount of money in the future that an amount of money today will yield

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compounding

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accumulation of a sum of money in, say, a bank account, where the interest earned remains in the account to earn additional interest in the future.

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Risk aversion

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a dislike of uncertainty

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Diversification

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The reduction of risk achieved by replacing a single risk with a large number of smaller unrelated risks.

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Firm-specific Risk

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risk that affects only a single company

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market risk

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risk that affects all companies in the stock market

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Fundamental analysis

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the study of a company's accounting statements and future prospects to determine its value.

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Efficient markets Hypothesis

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The theory that asset prices reflect all publicly available information about the value of an asset.

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Informational efficiency

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The description of asset prices that rationally reflect all available information.

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Random walk

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the path of a variable whose changes are impossible to predict.