macroeconomics chapters 6 – 10

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Business Cycle
alternate periods of economic expansion and economic recession, fluctuations in economic activity, such as employment and production
an economic slump; a depression; a decline
Real GDP or Real Gross Domestic Product
a measure of GDP in which the quantities produced are valued at the prices in a base year rather than at current prices
Nominal GDP
the value of final goods and services evaluated at current year prices
Unemployment Rate
measures the number of people who are able to work, but do not have a job during a period of time
a rise in the overall level of prices
Modern Economic Growth
the phenomenon in which nations for the first time have experienced sustained increases in real GDP per capita.
income not spent on consumption or when consumption is less than current output
when resources are devoted to benefits in the future; the use of assets to earn income or profit
Financial Investment
the purchase of assets like stocks, bonds, and real estate in hope of reaping a financial gain
Economic Investment
has to do with the creation and expansion of business enterprises. only includes money spent purchasing newly created capital goods such as machines, tools, ect
Demand Shocks
unexpected changes in the demand for goods and services ex. positive demand shocks refer to a situation in which demand turns out to be higher than expected. ex. negative demand shocks refer to a situation in which demand turns out to be lower than expected.
Supply Shocks
unexpected changes in the supply of goods and services
way people think about the future
when firms are expecting one thing to happen but then something else happens. (These sorts of decisions are necessitated by the shock and surprise of having to deal with an unexpected situation)
Flexible Prices
product prices that freely move upward or downward when product demand or supply changes, they react within seconds to change in supply and demand, rapidly adjusting
Fixed Prices
prices that remain the same
Inflexible Prices “Sticky Prices”
prices that don’t change easily
the merchandise that a shop has on hand
total dollar value of all final goods and services produced in a country during a single year
studies long run economic growth and short run economic fluctuations Their focus is on 3 key statistics real gdp,unemployment and inflation
Keys to Economic Growth
Savings, Investment (in a business)
National Income Accounting
Measures the economy’s performance by measuring the flows of income and expenditures.
Intermediate Goods
Goods purchased for resale or for use in producing another good or service.
Final Goods
Goods to be sold to the consumer for final use, these goods are not for resale.
Multiple Counting
Wrongly including the value of intermediate goods in the GDP counting the same good or service more than once.
Value Added
the gross value of the product – the costs of raw materials and energy
Public Transfer Payments
Government payments that are sent to certain households ex. Social Security, Welfare
Private Transfer Payments
Gifts, inheritances, charitable contributions are not included in GDP
Stock Market Transactions
Buying and selling of stocks
Expenditures Approach
The total or sum of all monies spent to purchase aggregate output. One of two ways to calculate GDP.
Income Approach
The total or sum of all income earned in the production of GDP. One of two ways to calculate GDP.
Personal Consumption Expenditures
All goods and services bought by households
Net Domestic Investment
Gross investment – depreciation
Government Purchases
spending by federal, state, and local governments on goods and services
Economic Growth
increase in total output or real GDP
Real GDP Per Capita
Ratio of real GDP divided by population.
Arithmetic Of Growth
70 / annual percentage rate of growth
Growth in the U.S
Due to Improved products, added leisure, other impacts
Institutional Structures that promote growth
Strong Property Rights, Patents and Copyrights, Efficient Financial Institutions, Literacy and Widespread Education Competitive Market System and Free Trade
Supply Factors
changes in the physical and technical agents of production; (in growth) this enables an economy to expand it’s potential GDP
Demand Factor
The increase in the level of aggregate demand that brings about the economic growth made possible by an increase in the production potential of the economy
Labor Force Participation Rate
the percentage of the working age population in the labor force
Growth Accounting
the supply-side elements such as productivity and labor inputs that contribute to changes in real GDP over some specific time period
a system of public works; the resources and facilities required for an activity; permanent military installations
Human Capital
The knowledge, skills, and abilities that make a worker productive
Economies of Scale
a situation in which long-run average cost increases as a firm’s output increases ex. markets increase it’s size over time
Information Technology
means that humans create to store and transmit information
Start Up Firms
various aspects of new information technology
Increasing returns
an increase in a firm’s output by a larger percentage than the percentage increase in its inputs
Rule of 70
70 / percentage growth rate = doubling time in years
Modern Economic Growth
Economic growth maintaining increase in RGDP per capita
Leader Countries
countries that develop and use advanced technologies, which then become available to follower countries
Follower Countries
countries that adopt advanced technologies that previously were developed and used by leader countries
Efficiency Factor
the capacity of an economy to combine resources effectively to achieve growth of real output that the supply factors make possible
Labor Productivity
is the amount of goods and services that a laborer produces in a given amount of time
Learning by Doing
when people become more productive in producing good by repeatedly producing the goods
Network Effects
as more consumers use a product, the value of the product rises;
Increasing Returns
doubling the input to increase the output
Start-Up Firms
small business with advanced new technology
the highest point of a mountain temporarily
a period of decline in total output
the bottom of a recession or depression
a period which real GDP, income and employment rises
Labor Force
the total number of workers, including both the employed and the unemployed
Unemployment Rate
= unemployed / labor force *100
Discouraged Workers
those who drop out of the labor force in frustration because they can’t find work
Frictional Unemployment
unemployment that occurs when people search and wait a job
Structural Unemployment
unemployment that occurs when workers’ skills do not match the jobs that are available
Cyclical Unemployment
unemployment caused by a decline in total spending or recession
Natural Rate of Unemployment
the normal rate of unemployment with full employment
Potential Output
The real output (GDP) occurs when an economy is fully employed
= actual GDP – potential GDP
Okun’s Law
For every 1% of unemployment rate exceeds the natural rate
Unemployment Factors
Jobs, age, race and ethnicity, gender, education and duration
Consumer Price Index (CPI)
The rate of Inflation CPI = (Price of Market Basket for a Particular year / price estimate of the market basket) * 100
demand pull inflation
Inflation caused by an increase in demand more than capacity
cost push inflation
When prices rise due to an increase in the cost of production.
Per Unit Production Cost
= total input cost / total of output
Nominal Income
The # of dollars received as rent, wages interest and profits
Real Income
Income measured in terms of the goods and services it can buy Real Income = Nominal Income / Price Index(in hundredths)
Unanticipated inflation
inflation that comes as a surprise to individuals in the economy
Anticipated Inflation
the rate of inflation that most individuals believe will occur
Cost of Living Adjustments (COLA)
Automatic adjustments of nominal income to the rate of inflation.
Real Interest Rate
the percentage increase in the purchasing power borrowers pay to the lender.
Nominal Interest Rate
the stated interest rate on a loan Nominal Interest Rate = real interest rate + inflation premium(is the expected rate of inflation)
a decline in the price level
When inflation is out of control
45 degree line
a reference line that consumption would equal disposable income; C=DI
Consumption Schedule
consumption function that reflects direct consumption-disposable income relationship C = DI – S
Savings Schedule
“Savings function” savings S = DI- C
Break Even Income
This is the income when consumption = disposable income C = D.I.
Average Propensity to Consume
APC = Consumption / Income
Average Propensity to Save
APS = Saving / Income
Marginal Propensity to Consume
MPC = Change in desired Consumption / Change in Income, MPC = C / DI
Marginal Propensity to Save
MPS = Marginal Propensity to Save – the change in one’s savings caused by the change in one’s income. MPS = change in savings (S) / change in income (I) MPS = C / DI
MPC + MPS = 1
MPC is the slope of the consumption schedule MPS is the numerical value of the slope of the saving schedule Both Added together = 1
Wealth Effect
shifts the consumption schedule upward and the saving schedule downward
Expected Rate of Return
the annual rate of return that a firm expects to obtain through a capital investment. r = profit / total cost
Investment Downward Curve
The amount of investment forthcoming at each real interest rate It shifts based on the relationship between the interest rate and the amount of investment demanded
The assumption that a economy has room to expand = ratio of the change in Real GDP (RGDP) divided by the original change in spending that causes the change in GDP Multiplier = RGDP / C or 1 / MPS or 1 / 1 – MPC
Categories: Macroeconomics