W- Maco (1102) Economics

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Aggregation

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means combining many individual markets into one overall market

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Deflation

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refers to a sustained decrease in the general price level.

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Final goods and services

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are those that are purchased by their ultimate users.

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Fiscal policy

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is its plan for spending and taxation. It can be used to steer aggregate demand in the desired direction.

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Gross domestic product (GDP

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is the sum of the money values of all final goods and services produced in the domestic economy and sold on organized markets during a specified period of time, usually a year.

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Inflation

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refers to a sustained increase in the general price level.

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Intermediate good

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is a good purchased for resale or for use in producing another good.

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Monetary policy

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refers to actions taken by the Federal Reserve to influence aggregate demand by changing interest rates.

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Nominal GDP

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is calculated by valuing all outputs at current prices.

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Real GDP

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is calculated by valuing outputs of different years at common prices. Therefore, real GDP is a far better measure than nominal GDP of changes in total production.

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Real GDP per capita

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is the ratio of real GDP divided by population.

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Recession

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is a period of time during which the total output of the economy declines.

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Stabilization policy

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is the name given to government programs designed to prevent or shorten recessions and to counteract inflation .

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Stagflation

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is inflation that occurs while the economy is growing slowly (“stagnating”) or in a recession.

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Capital gain

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is the difference between the price at which an asset is sold and the price at which it was bought.

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Cyclical unemployment

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is the portion of unemployment that is attributable to a decline in the economy’s total production. rises during recessions and falls as prosperity is restored.

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Discouraged worker

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is an unemployed person who gives up looking for work and is therefore no longer counted as part of the labor force.

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Frictional unemployment

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is unemployment that is due to normal turnover in the labor market. It includes people who are temporarily between jobs because they are moving or changing occupations, or are unemployed for similar reasons.

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Full employment

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is a situation in which everyone who is willing and able to work can find a job. At full employment, the measured unemployment rate is still positive.

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Growth policy

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refers to government policies intended to make the economy grow faster in the long run.

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Labor force

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is the number of people holding or seeking jobs.

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Labor productivity

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is the amount of output a worker turns out in an hour (or a week, or a year) of labor. If output is measured by GDP, it is GDP per hour of work.

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Nominal rate of interest

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is the percentage by which the money the borrower pays back exceeds the money that she borrowed, making no adjustment for any decline in the purchasing power of this money that results from inflation.

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Potential GDP

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is the real GDP that the economy would produce if its labor and other resources were fully employed.

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Production function

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shows the volume of output that can be produced from given inputs (such as labor and capital), given the available technology.

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Purchasing power

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of a given sum of money is the volume of goods and services that it will buy.

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Real rate of interest

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the percentage increase in purchasing power that the borrower pays to the lender for the privilege of borrowing. It indicates the increased ability to purchase goods and services that the lender earns.

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Real wage rate

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is the wage rate adjusted for inflation. Specifically, it is the nominal wage divided by the price index. The real wage thus indicates the volume of goods and services that the nominal wages will buy.

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Relative price

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is its price in terms of some other item rather than in terms of dollars.

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Structural unemployment

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refers to workers who have lost their jobs because they have been displaced by automation, because their skills are no longer in demand, or because of similar reasons.

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Unemployment insurance

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is a government program that replaces some of the wages lost by eligible workers who lose their jobs.

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Unemployment rate

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rate is the number of unemployed people, expressed as a percentage of the labor force.

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Capital

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is its available supply of plant, equipment, and software. It is the result of past decisions to make investments in these items.

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Capital formation

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holds that nations with low levels of productivity tend to have high productivity growth rates, so that international productivity differences shrink over time.

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Cost disease of the personal services

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of the personal services, service activities that require direct personal contact tend to rise in price relative to other goods and services.

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Development assistance (“foreign aid”)

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refers to outright grants and low-interest loans to poor countries from both rich countries and multinational institutions like the World Bank. The purpose is to spur economic development.

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Foreign direct investment

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is the purchase or construction of real business assets—such as factories, offices, and machinery—in a foreign country.

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Human capital

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is the amount of skill embodied in the workforce. It is most commonly measured by the amount of education and training.

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Innovation

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is the act of putting new ideas into effect by, for example, bringing new products to market, changing product designs, and improving the way in which things are done.

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Invention

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is the act of discovering new products or new ways of making products.

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Investment

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s the flow of resources into the production of new capital. It is the labor, steel, and other inputs devoted to the construction of factories, warehouses, railroads, and other pieces of capital during some period of time.

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Multinational corporations

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are corporations, generally large ones, which do business in many countries. Most, but not all, of these corporations have their headquarters in developed countries.

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On-the-job training

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refers to skills that workers acquire while at work, rather than in school or in formal vocational training programs.

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Property rights

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are laws and/or conventions that assign owners the rights to use their property as they see fit (within the law)—for example, to sell the property and to reap the benefits (such as rents or dividends) while they own it.

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Research and development (R&D)

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refers to activities aimed at inventing new products or processes, or improving existing ones.

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Aggregate demand

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is the total amount that all consumers, business firms, and government agencies spend on final goods and services.

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Consumer expenditure (C)

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is the total amount spent by consumers on newly produced goods and services (excluding purchases of new homes, which are considered investment goods).

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Consumption function

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shows the relationship between total consumer expenditures and total disposable income in the economy, holding all other determinants of consumer spending constant.

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Disposable income (DI)

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is the sum of the incomes of all individuals in the economy after all taxes have been deducted and all transfer payments have been added.

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Government purchases (G)

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refer to the goods (such as airplanes and paper clips) and services (such as school teaching and police protection) purchased by all levels of government.

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Investment spending (I)

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is the sum of the expenditures of business firms on new plant and equipment and households on new homes. Financial “investments” are not included, nor are resales of existing physical assets.

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Marginal propensity to consume (MPC)

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is the ratio of changes in consumption relative to changes in disposable income that produce the change in consumption. On a graph, it appears as the slope of the consumption function.

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Money-fixed asset

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A money-fixed asset is an asset whose value is a fixed number of dollars.

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National income

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is the sum of the incomes that all individuals in the economy earned in the forms of wages, interest, rents, and profits. It excludes government transfer payments and is calculated before any deductions are taken for income taxes.

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Net exports

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is the difference between exports (X) and imports (IM). It indicates the difference between what we sell to foreigners and what we buy from them.

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Scatter diagram

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s a graph showing the relationship between two variables (such as consumer spending and disposable income). Each year is represented by a point in the diagram, and the coordinates of each year’s point show the values of the two variables in that year.

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Transfer payments

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are sums of money that the government gives certain individuals as outright grants rather than as payments for services rendered to employers. Some common examples are Social Security and unemployment benefits.

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Autonomous increase in consumption

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is an increase in consumer spending without any increase in consumer incomes. It is represented on a graph as a shift of the entire consumption function.

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Coordination failure

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occurs when party A would like to change his behavior if party B would change hers, and vice versa, and yet the two changes do not take place because the decisions of A and B are not coordinated.

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Equilibrium

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refers to a situation in which neither consumers nor firms have any incentive to change their behavior. They are content to continue with things as they are.

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Expenditure schedule

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shows the relationship between national income (GDP) and total spending.

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Income-expenditure diagram, or 45° line diagram

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plots total real expenditure (on the vertical axis) against real income (on the horizontal axis). The 45° line marks off points where income and expenditure are equal.

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Induced increase in consumptio

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is an increase in consumer spending that stems from an increase in consumer incomes. It is represented on a graph as a movement along a fixed consumption function.

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Induced investment

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is the part of investment spending that rises when GDP rises and falls when GDP falls.

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Inflationary gap

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is the amount by which equilibrium real GDP exceeds the full-employment level of GDP.

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Multiplier

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is the ratio of the change in equilibrium GDP (Y) divided by the original change in spending that causes the change in GDP

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Recessionary gap

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is the amount by which the equilibrium level of real GDP falls short of potential GDP.

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Aggregate supply curve

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shows, for each possible price level, the quantity of goods and services that all the nation’s businesses are willing to produce during a specified period of time, holding all other determinants of aggregate quantity supplied constant.

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Productivity

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is the amount of output produced by a unit of input.

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Self-correcting mechanism

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refers to the way money wages react to either a recessionary gap or an inflationary gap. Wage changes shift the aggregate supply curve and therefore change equilibrium GDP and the equilibrium price level.