Basic Concepts Flashcards
Economics
The study of how to allocate scarce resources among competing ends
Macroeconomics
Branch of economics that deals with the whole economy and issues that affect most of society
Microeconomics
Branch of economics that looks at decision making at the firm, household, and individual levels and studies behavior in markets for particular goods and services
Gross Domestic Product (GDP)
The total value of all final goods and services produced in a year within that country
National Income (NI)
The sum of income earned by the factors of production owned by a country’s citizens
Personal Income (PI)
The money income received by households before personal income taxes are subtracted
Disposable Income (DI)
Personal income minus personal income taxes
Expenditure Approach
Adds up spending by households, firms, the government, and the rest of the world (GDP=C+I+G+(X-M))
Income Approach
Makes use of the fact that expenditures on GDP ultimately become income (GDP=NI+Depreciation-Subsidies+Net Income of Foreigners)
Depreciation
The decline in the value of capital over time due to wear or obsolescence
Subsidy Payments
Payments made by the government to farmers
Net Domestic Product
GDP minus depreciation (Indicates how much output is left over for consumption and additions to capital stock after replacing the capital used up in the production process)
Deflation
A sustained decrease in the general price level
Nominal
Actual number
Real
Purchasing power
Money Illusion
Noting an increase in income but not the change in prices of all products
Menu Costs
Cost of changing price listings
Consumer Price Index (CPI)
Government’s gauge of inflation (CPI=(Cost of Base Year Basket/Cost of Current Year Basket) x 100)
Inflation Between Years
((CPI in Year 1/CPI in Year 2)-1) x 100
Real GDP
(Nominal GDP/CPI for the same year) x 100
Producer Price Index (PPI)
Similar calculations as CPI, but applies to the prices of wholesale goods
Gross Domestic Product Deflator
An alternative general price index that reflects the importance of products in current market baskets (GDP Deflator= (Cost of Current Basket at current prices/Cost of Current Basket at base year prices) x 100)
Labor Force
Includes employed and unemployed adults
Unemployed
A labor force participant must be willing and able to work, and must have made an effort to seek work in the past four weeks
Labor Force Participation Rate (LFPR)
The number of people in the labor force divided by the working-age population
Unemployment Rate
Unemployed divided by the total number in the labor force and then converted into a percent
Frictional Unemployment
Occurs as unemployed workers and firms search for the best available worker-job matches (New laborers, people seeking jobs due to moving)
Structural Unemployment
The result of a skills mismatch (Being replaced by a robot or other software)
Cyclical Unemployment
Results from downturns in the business cycle (Losing a job during a recession or depression)
Seasonal Unemployment
The result of changes in hiring patterns due to the time of the year (Ski resorts, lifeguards)
Discouraged Workers
Those who are willing and able to work, but become so frustrated in their attempts to find work that they stop trying
Natural Rate of Unemployment
The typical rate of unemployment in a normally functioning economy (4-5% in the United States)
Dishonest Workers
Claim to be unemployed in order to receive unemployment benefits when they actually do not want a job or are working in an unreported job
Full Employment
The level of employment that corresponds with the natural rate of unemployment
Okun’s Law
Estimate that for every one percentage point increase in the unemployment rate above the natural rate, output falls by 2-3 percentage points
[Short-Run] Aggregate Supply ([SR]AS)
Indicates the total value of output that producers are willing and able to supply at alternative price levels in a given time period
Aggregate Demand (AD)
Total demand for goods and services in an economy
Price Level
Average level of all prices
Long-Run Aggregate Supply Curve (LRAS)
Stands at the level of output that corresponds with full employment
Say’s Law
The idea that supply creates its own demand
Theory of Rational Expectations
Suggests that people learn to anticipate government policies designed to influence the economy, thereby making the policies ineffectual
