EXAM 1 Flashcards
4 main elements of the economy
households, businesses, governments and foreign countries
microeconomics
functioning of individual industries and behavior of individual economic decision making units, who gets the goods and services produced?
macroeconomics
factors that determine national output/product, looks at overall price level rising and falling, questions how many people will be hired in a year at a specific industry
economics
the study of how individuals choose to use resources provided by nature, behavioral science on how people make choices
opportunity cost
the best alternative given up when making a decision, occurs because resources are scarce
marginalize
process of analyzing the additional costs or benefits from a choice
efficient market
where profit opportunities are eliminated instantly
positive economics
understanding behavior and the operation of the economic systems without making judgments on the outcome
normative economics
looks at outcomes of economic behavior and asks if they are good or bad or if they can be improved
model
formal statement of a theory (usually mathematical) of a presumed relationship between two variables
variable
measure that can change from time to time
ceteris paribus
all else is equal, this is used to analyze a relationship between two variables while all others are unchanged
empirical economics
collection and use of data to test economic theories
4 criteria for judging economic outcomes
efficiency, equity, growth, stability
economic efficiency
condition in which the economy produces what people want at the least possible cost
economic equity
fairness, more equal distribution of income and wealth
economic growth
increase in total outcome of economy, occurs when a soccer acquires new resources or learns to produce more, when something was previously unattainable is now attainable
economic stability
the condition in which national output is growing steadily with low inflation and full employment resources
capital
things that are produced and used in production of other goods and future services
examples of capital
buildings, equipment, desks, roads
factors of production
inputs into the production process
3 specific factors of production
land labor and capital
theory of comparative advantage
specialization and free trade will benefit all parties even when some are more efficient than others
absolute advantage
a producer can produce the same product as another good or service if they can do so using fewer resources lowering the cost per unit
comparative advantage
producing at a lower opportunity cost, trading present for future benefits
consumer goods
goods for present consumption, capital does not need to be tangible
investment
using resources to produce new capital
production possibility frontier (PPF)
graphic device that illustrates choice, opportunity cost and scarcity
marginal rate of transformation (MRT)
slope values of a societies PPF
economic expansion
economy is producing more, COULD be because of economy growth but not necessarily, PPF stays the same, we do not have things that were previously unattainable
economic contraction
we lose resources, entire PPF shifts, different than a recession because we just move to the interior of the PPF
saving
trading present for future benefits
intermediate good
a good that has not reached its final resting point
business cycle
a graphical representation of an economy production over time as a comparison to its potential production, ups and downs in performance
aggregate output
measure of how the economy is doing, total quantity of goods and services produced in a given period
expansion or boom
period from trough to peak of business cycle
recession or contraction
period from peak to trough of business cycle, a slump
depression
prolonged recession
unemployment rate
percentage of the labor force that is unemployed
inflation
increase in overall price
deflation
decrease in overall price
transfer payments
recipients do not supply goods, services or labor
goods and services market
households and government purchase goods in the market and from each other
labor market
when firms and gov purchase labor from households, households supply labor and gov demands it
money market
households purchase stocks and bonds from firms
share of stock
financial instrument that gives the holder a share in the firms profit
dividends
the firm can return some of its profit to stockholders instead of buying capital
fiscal policy
gov decision on how much to tax and spend
expansionary fiscal policy
taxes are cut or gov spending increases
contractionary fiscal policy
tax increases or gov spending decreases
great depression
severe economic contraction and a period of high unemployment, 1930s
stagflation
a situation in which there is high inflation on and off
financial markets
households save, businesses borrow
business sector and household sector
these two interact in the product market and factors market
government sector
takes those households and businesses taxes
foreign sector
we engage through imports and exports
blockage
problem in the economy
indicators of a healthy economy
steady and sustainable economic growth, full employment (low unemployment), stable prices and inflation
GDP
total market value of a countries output, the value of all final goods produced in a certain time
old output
not considered GDP because it was already counted when it was produced
expenditure approach
sums all the expenditures (purchases) on final goods as a proxy for production
factor income approach
sums up all the income earned in a given period
value added approach
adds up the value of each good at each stage go the production process
current dollars
nominal GDP, value in current dollars today
billions of chained dollars
real GDP, eliminates the role inflation plays
G-Gross
depreciation is included
D-Domestic
production within a countries borders
P-Product
only final goods and services included
depreciation
replacing old worn out capital
gross private investment
purchase of new capital (finished product used to produce more), new home construction, chances in inventory levels
personal consumption expenditures (C)
households spending on consumer goods
gross private domestic investment (I^a)
spending by firms and households on new capital
government expenditures and gross consumption
expenditures by federal, state, and local governments for final goods and services
net exports (EX-IM)–>(NX)
net spending by the rest of the world, exports minus imports
durable goods
last a relatively long time
nondurable goods
used up quickly
services
things we buy that do not involve production of a physical item
nonresidential investment
expenditures by firms for machines, tools
residential investment
expenditures for new houses and apartment buildings
change in business inventory
amount changed in given period
gross investment
total value of all newly produced capital goods
net investment
gross investment minus depreciation
national income
the total income earned by the factors of production owned by a country’s citizens (8 income items summed up)
compensation of employees
largest component of national income, includes wages and salaries paid to house hold firms by gov
proprietors income
income of unincorporated businesses
rental income
minor, income received by property owners in form of rent
corporate income
second largest component of national income, income of corporations
net interests
interest paid by businesses
indirect taxes minus subsidies
taxes such as sales taxes, customs duties and license fees
net business transfer payments
transfer payments paid from business to others which are the income of others
surplus of gov enterprises
income of gov enterprises
net national product (NNP)
GNP-depreciation
statistical discrepancy
data measurement error
personal income
total income of households, income flowing in to households
personal saving rate
percent of disposable personal income saved
nominal GDP
GDP measured in current dollars
fixed weight procedure
uses weight from a given base year
Bureau of Labor Statistics
Calculates unemployment rate every month and it is released on the first Friday of each month at 8
consumer price index (CPI)
fixed weight index, does not account for consumers substitution away from high priced goods which leads to a tendency to overestimate inflation, computed by BLS each month, used to calculate inflation rate
producer price index (PPI)
indexes of prices that producers receive for productions at various stages not just at the final stage, detects prices early
3 categories of PPIs
finished goods, intermediate materials, crude materials
