Key Terms from Textbook Flashcards
Economics
study of how people, individually and collectively, manage resources
Microeconomics
the study of how individuals and firms manage resources
Macroeconomics
the study of the economy on a regional, national, or international scale
Rational Behaviour
making choices to achieve goals in the most effective way possible
Scarcity
the condition of wanting more than we can get with available resources
Opportunity Cost
the value of what you have to give up in order to get something; the value of your next best alternative
Marginal Decision Making
comparison of additional benefits of a choice against the additional costs it would bring, without considering related benefits and costs of past choices
Sunk Cost
a cost that has already been incurred and cannot be recovered or refunded
Incentive
something that causes people to behave in a certain way by changing the trade-offs they face
Efficiency
use of resources in the most productive way possible to produce the goods and services that have the greatest total economic value to society
Correlation
a consistently observed relationship between two events or variables
Causation
a relationship between two events in which one brings about the other
Model
a simplified representation of the important parts of a complicated situation
Circular Flow Model
a simplified representation of how the economy’s transactions work together
Positive Statement
a factual declaration about how the world actually works
Normative Statement
a claim about how the world should be
Gross Domestic Product (GDP)
the sum of the market values of all final goods and services produced within a country in a given period of time
Gross National Product (GNP)
the sum of the market values of all final goods and services produced plus capital owned by the residents of a country in a given period of time
Consumption (C)
spending on goods and services by private individuals and households
Investment (I)
spending on productive inputs, such as factories, machinery, and inventories
Inventory
the stock of goods that a company produces now but does not sell immediately
Government Purchases (G)
spending on goods and services by private individuals and households
Net Exports (NX)
exports - imports; the value f goods and services produced domestically and consumed abroad minus the values of goods and services produced abroad and consumed domestically
Real GDP
GDP calculation in which goods and services are valued at constant prices
Nominal GDP
GDP calculation in which goods and services are valued at current prices
GDP Deflator
a measure of the overall increase in prices in an economy, using the ration between the real and nominal GDP
GDP per Capita
a country’s GDP divided by its population
Recession
a period of significant economic decline
Depression
a particularly severe or extended recession
Market Basket
a list of specific goods and services in fixed quantities
Price Index
a measure showing how much the cost of a market basket has risen or fallen relative to the cost in a base period or location
Consumer Price Index (CPI)
a measure that tracks changes in the cost of a basket of goods and services purchased by a typical Canadian household as calculated by Statistics Canada
Inflation Rate
the size of the change in the overall price level
Indexing
the practice of automatically increasing payments as the cost of living increases
Purchasing Power Parity
the theory that price levels in different countries should be the same when stated in a common currency
PPP-Adjustment
recalculating economic statistics to account for differences in price levels across countries
Productivity
output produced per worker
Physical Capital
the stock of equipment and structures that allow for production of goods and services
Human Capital
the set of skills, knowledge, experience, and talent that determines the productivity of workers
Convergence Theory
the theory that countries that start out poor will initially grow faster than rich ones but will eventually converge to the same growth rate
Investment Trade-Off
a substitution of current consumption or investment in physical capital for future production
Domestic Savings
savings for capital investment that come from within a country, equals domestic income minus consumption spending
Foreign Direct Investment (FDI)
investment when a firm runs part of its operation abroad or invests in another company abroad
unemployment
situation in which someone wants to work but cannot find a job
Labour Force
people who are in the working-age population and are either employed or unemployed
Unemployment Rate
the number of unemployed people divided by the number of people in the labour force
Labour-Force Participation Rate
the number of people in the labour force divided by the number of people in the labour force
discouraged workers
workers who have looked for work in the past year but have given up looking because of the condition of the labour market
underemployed
workers who are either working less than they would like to or are working in jobs below their skill level
Labour Demand Curve
a graph showing the relationship between the wage rate and the total labour demanded from all the firms in the economy
Labour Supply Curve
a graph showing the relationship between the total labour supplied in the economy and the wage rate
Natural Rate of Unemployment
the minimum level of unemployment that is unavoidable in a dynamic economy
Frictional Unemployment
unemployment caused by workers who are changing location, job, or career
Structural Unemployment
unemployment due to a mismatch between the skills workers can offer and the skills in demand
Real-Wage or Classical Unemployment
unemployment that results from wages being higher than the market-clearing level
Cyclical Employment
unemployment resulting from changes in GDP
Labour Unions
groups of employees who join together to bargain with their employers over salaries and work conditions
Efficiency Wages
a wage that is deliberately set above the market rate to increase worker productivity
Employment Insurance
money paid by the government to people who are unemployed
Aggregate Demand Curve
a curve that shows the relationship between the overall price level in the economy and the total demand
Aggregate Supply Curve
a curve that shows the relationship between the overall price level in the economy and total production by firms
Business Cycle
fluctuations of GDP either above or below the potential level of GDP in the economy
Supply Shock
significant event that directly affects production and the aggregate-supply curve in the short run
Fiscal Policy
government decisions about the level of taxation and government spending
Expansionary Fiscal Policy
fiscal policy that increase aggregate demand
Contractionary Fiscal Policy
fiscal policy that decreases aggregate demand
Automatic Stabilizers
taxes and government spending that affect fiscal policy without specific action from policy makers
Multiplier Effect
the increase in consumer spending that occurs when spending by one person causes others to spend more, too, increasing the impact of the initial spending on the economy
Marginal Propensity to Consumer (MPC)
the amount that consumption increases when after-tax income increase by $1
Government Spending Multiplier
the amount by which GDP increases when government spending increases by $1
Budget Deficit
the amount of money a government spends beyond the revenue it brings in
Budget Surplus
the amount of revenue a government brings in beyond what it spends
Public Debt
the total amount of money that a government owes at a point in time
Financial Market
a market in which people trade future claims on funds or goods
Market for Loanable Funds
a market in which savers supply funds to those who want to borrow
Savings
the portion that is not immediately spent on consumption of g and s
Investment
spending on productive inputs, such as factories, machinery, and inventories
Interest Rate
the price of borrowing money for a specified period of time, expressed as a percentage per dollar borrowed and per unit of time
Crowding Out
the reduction in private borrowing caused by an increase in government spending
GOVERNMENT CROWDS OUT US PEASANTS
Default
the failure of a borrower to pay back a loan according to the agreed-upon terms
Risk-Free Rate
the interest rate at which money would be loaned if there were no risk of default; usually approximated by interest rates on government debt
Financial System
the group of institutions that bring together savers, borrowers, investors, and insurers in a set of interconnected markets where people trade financial products
Financial Intermediaries
institutions that channel funds from people who have them to people who want them
Liquidity
a measure of how easily a particular asset can be converted quickly to cash without much loss of value
Diversification
the process by which risks are shared across many different assets or people, reducing the impact of any particular risk on any one individual
Stock
a financial asset that represents partial ownership of a company
Dividend
a payment made periodically, typically quarterly or annually, to all shareholders of a company
Loan
an agreement in which a lender gives money to a borrower in exchange for a promise to repay the amount plus an-agree
Bond
a form of debt that represents a promise by the bond issuer to repay the face value of the loan, at a specified maturity date, and to pay periodic interest at a specific percentage rate
Derivative
an asset whose value is based on the value of another asset
Mutual Fund
any a portfolio of stocks and other assets managed by a professional who makes decisions on behalf of clients
Pension Fund
professionally managed portfolio of assets intended to provide an income to retirees
Market Risk
any risk that is broadly shared by the entire market or economy
Idiosyncratic Risk
any risk that is unique to a particular company or asset
Standard Deviation
a measure of how spread out a set of numbers is
Net Present Value (NPV)
a measure of the current value of a stream of cash flows expected in the future
Efficient-Market Hypothesis
the idea that market pries always incorporate all available information, and therefore represent true value as correctly as is possible
Arbitrage
the process of taking advantage of market inefficiencies to earn profit
Private Savings
the savings of individuals or corporations within a country
Public Savings
the difference between government tax revenue and government spending
National Savings
the sun of the private savings of individuals and corporations plus the public savings of the government
Closed Economy
an economy that does not interact with other countries’ economy
Open Economy
an economy that interacts with other countries’ economies
Net Capital Flow
the difference between capital inflows and capital outflows
Money
the set of all assets that are regularly used to direct the purchase of g & s
Store of Value
a certain amount of purchasing power that money retains over time
Medium of Exchange
the ability to use money to purchase g & s
Fiat Money
money created by rule, without any commodity to back it
Demand Deposits
funds held in bank accounts that can be withdrawn by depositors at any time without advanced notice
Reserves
the money that a bank keeps on hand, either in cash of in deposits at the federal bank
Reserve Ratio
the ratio of the total amount of demand deposits at a bank to the amount kept as cash reserves
Desired Reserves
in the absence of required reserves, the amount of reserves a bank wishes to hold
Excess Reserves
any additional amount, beyond the required reserves, a bank chooses to keep in reserves
Money Multiplier
the ratio of money created by the lending activities of the banking system to the money created by the central bank
Fractional-Reserve Banking
a banking system in which banks keep on reserves less than 100% of their deposits
Money Supply
the amount of money available in the economy
M1
include cash plus chequeing account balances
M2
M1 plus savings accounts and other financial instruments where money is locked away for a specified amount of time: less liquid than M1
Central Bank
the institution ultimately responsible for managing the nation’s money supply and coordinating the actions of the banking system to ensure a sound economy
Monetary Policy
actions by the central bank to manage the money supply, in pursuit of certain macroeconomic goals
Reserve Requirement
the regulation that sets the minimum fraction of deposits banks must hold in the reserve
Open-Market Operations
sales or purchases of government bonds by the central bank, to of from commercial banks, on the open market
Contractionary Monetary Policy
actions that reduce the money supply in order to increase aggregate demand
Expansionary Monetary Policy
actions that increase the money supply in order to increase aggregate demand
Overnight Rate
the interest rate at which banks choose to lend reserves held at the Bank of Canada to one another, usually just overnight
Liquidity-Preference Model
the idea that the quantity of money people want to hold is a function of the interest rate
Leverage
the practice of using borrowed money to pay for investments
Securitization
the practice of packaging individual debts into a single uniform asset
Stagflation
high inflation despite low economic growth and high unemployment
Too Big to Fall
so large in terms of assets or customer, or so historically important, that banking regulators allow the bank of company to keep operating despite insolvency
Quantitative Easing
policies that are designed to directly increase the money supply by a certain amount
Follow a Herd Instinct
investing in something simply because everyone else is doing it
Recency Effect
human tendency to overvalue recent experience when trying to predict the future
Margin Call
if it looks like you’re in danger of running through your money, the broker will force you to sell your stock and use the money to pay back the loan
Securitization
the practice of packaging individual debts into a single uniform asset
Balance of Trade
the value fo exports minus the value of imports
Trade Deficit
a negative balance of trade; a greater amount of imports than exports
Trade Surplus
a positive balance of trade; greater amount of exports than imports
Foreign Direct Investment (FDI)
investment when a firm runs art of its operation abroad it invests in another company abroad
Foreign Portfolio Investment (FPI)
investment funded by foreign sources but operated domestically
Net Capital Outflow (NCO)
the net flow of funds invested outside of a country
Balance-of-Payments Identify
an equation that shows that the value of net exports equals the net capital outflow
Exchange Rate
the value of one currency expressed n terms of another currency
Exchange Rate-Appreciation
an increase in the value of a currency relative to other currencies
Exchange Rate-Depreciation
a decrease in the value of a currency relative to other currencies
Floating Exchange Rate
an exchange rate whose value is determined by the market
Fixed Exchange Rate
an exchange rate that is set by the government, instead of determined by the market
Nominal Exchange Rate
the stated rate at which one country’s currency can be traded for another country’s currency
Real Exchange Rate
the value of goods in one country expressed in terms of the same goods in another country
