Section 3 VOCABULARY: MEASUREMENT OF ECONOMIC PERFORMANCE

Question 1

National Income and Product Accounts (NIPA):

Answer 1

A set of economic statistics that track the overall economic performance of a country, including measures of national income, production, and spending.

Question 2

National Accounts:

Answer 2

Records and reports of a country’s economic transactions, which include data on production, income, and expenditures. These accounts provide a comprehensive picture of the economic activity within a nation.

Question 3

Household:

Answer 3

An individual or a group of people living together and making joint economic decisions. Households are the primary consumers of goods and services and provide labor to firms.

Question 4

Firm:

Answer 4

A business organization that produces goods and services to sell in the market. Firms are the primary producers in an economy and pay wages to households for their labor.

Question 5

Product Markets:

Answer 5

Markets where final goods and services are bought and sold. Consumers purchase products from firms in these markets.

Question 6

Factor Markets:

Answer 6

Markets where factors of production (like labor, capital, and land) are bought and sold. Firms purchase factors of production from households in these markets.

Question 7

Consumer Spending:

Answer 7

The total amount of money spent by households on goods and services. This spending is a major component of aggregate demand.

Question 8

Stock:

Answer 8

A type of financial security that represents ownership in a corporation. Stocks give shareholders a claim on a portion of the company’s assets and earnings.

Question 9

Bond:

Answer 9

A type of financial security that represents a loan made by an investor to a borrower (typically a corporation or government). Bonds pay interest over time and return the principal at maturity.

Question 10

Government Transfers:

Answer 10

Payments made by the government to individuals or households without requiring any goods or services in return, such as Social Security or unemployment benefits.

Question 11

Disposable Income:

Answer 11

The amount of money that households have left after paying taxes and receiving government transfers. It represents the income available for consumption and savings.

Question 12

Private Savings:

Answer 12

The portion of disposable income that households do not spend on consumption. It is saved and potentially invested in financial markets.

Question 13

Financial Markets:

Answer 13

Markets where financial securities, such as stocks and bonds, are bought and sold. They help allocate resources and distribute risk.

Question 14

Government Borrowing:

Answer 14

The process by which the government raises funds by issuing bonds or taking loans. Government borrowing can fund public projects and services.

Question 15

Government Purchases of Goods and Services:

Answer 15

Spending by the government on goods and services that are used for public purposes, such as defense, education, and infrastructure.

Question 16

Exports:

Answer 16

Goods and services produced domestically and sold to foreign buyers. Exports contribute to a country’s GDP and trade balance.

Question 17

Imports:

Answer 17

Goods and services produced abroad and purchased by domestic consumers. Imports are subtracted from GDP when calculating net exports.

Question 18

Inventories:

Answer 18

Goods that firms produce but have not yet sold. Inventories are counted in GDP calculations as part of investment spending.

Question 19

Investment Spending:

Answer 19

Expenditures by firms on capital goods (like machinery and buildings) and by households on new housing. It represents spending on new productive assets.

Question 20

Final Goods and Services:

Answer 20

Products that are purchased for final use by consumers, businesses, or the government, rather than for further production or resale.

Question 21

Intermediate Goods and Services:

Answer 21

Products that are used as inputs in the production of final goods and services. They are not counted separately in GDP to avoid double counting.

Question 22

Gross Domestic Product (GDP):

Answer 22

The total value of all final goods and services produced within a country in a given period. It measures the economic performance of a country.

Question 23

Aggregate Spending:

Answer 23

The total amount of spending in an economy, including consumption, investment, government purchases, and net exports (exports minus imports).

Question 24

Value Added:

Answer 24

The additional value that a firm adds to a product at each stage of production. It is the difference between a product’s sales price and the cost of intermediate goods used to produce it.

Question 25

Net Exports:

Answer 25

The value of a country’s exports minus its imports. It measures the trade balance and is a component of GDP.

Question 26

Aggregate Output:

Answer 26

The total quantity of goods and services produced in an economy over a specific period. It measures the economy’s overall production.

Question 27

Real GDP:

Answer 27

The measure of a country’s economic output adjusted for inflation. It reflects the value of all final goods and services produced within a country, expressed in constant prices, and allows for comparisons across different time periods.

Question 28

Nominal GDP:

Answer 28

The measure of a country’s economic output using current prices, without adjusting for inflation. It reflects the value of all final goods and services produced within a country at the prices that are actually observed in the market.

Question 29

Chain-Linking:

Answer 29

A method used to calculate real GDP that links together different years’ GDP estimates to produce a more accurate measure of economic growth. It adjusts for changes in prices and quantities over time.

Question 30

GDP per Capita:

Answer 30

The measure of a country’s economic output per person, calculated by dividing the GDP by the total population. It provides an average economic output per individual and is often used as an indicator of living standards.

Question 31

Employed:

Answer 31

Individuals who are currently working for pay or profit, including part-time and full-time jobs.

Question 32

Unemployed:

Answer 32

Individuals who are actively seeking work and are available to work but are currently without a job. They are counted as part of the labor force.

Question 33

Labor Force:

Answer 33

The total number of people who are either employed or actively seeking employment. It includes both the employed and the unemployed.

Question 34

Labor Force Participation Rate:

Answer 34

The percentage of the working-age population that is either employed or actively seeking employment. It is calculated by dividing the labor force by the working-age population and multiplying by 100.

Question 35

Unemployment Rate:

Answer 35

The percentage of the labor force that is unemployed and actively seeking work. It is calculated by dividing the number of unemployed individuals by the labor force and multiplying by 100.

Question 36

Discouraged Workers:

Answer 36

Individuals who have given up searching for work because they believe there are no job opportunities available for them. They are not counted as part of the labor force.

Question 37

Marginally Attached Workers:

Answer 37

Individuals who are not currently in the labor force but have looked for work in the past 12 months and are available to work. They are not counted as unemployed because they are not actively seeking work at the moment.

Question 38

Underemployed:

Answer 38

Individuals who are working part-time or in jobs below their skill level but would prefer full-time or higher-skilled employment. They are employed but may not be fully utilizing their capabilities.

Question 39

Job Search:

Answer 39

The process of looking for employment opportunities. It involves activities like applying for jobs, attending interviews, and networking to find suitable work.

Question 40

Frictional Unemployment:

Answer 40

The type of unemployment that occurs when people are temporarily unemployed while transitioning between jobs or entering the labor force for the first time. It is usually short-term and results from the normal job search process.

Question 41

Structural Unemployment:

Answer 41

The type of unemployment that arises from a mismatch between the skills that workers have and the skills needed by employers. It often results from long-term changes in the economy, such as technological advancements or shifts in industry demand.

Question 42

Efficiency Wages:

Answer 42

Wages that are set above the market equilibrium level to increase worker productivity, reduce turnover, or attract higher-quality workers. Employers pay efficiency wages to improve their overall efficiency and performance.

Question 43

Natural Rate of Unemployment:

Answer 43

The rate of unemployment that exists when the economy is operating at full potential. It includes frictional and structural unemployment but excludes cyclical unemployment. It reflects the normal, long-term level of unemployment in a healthy economy.

Question 44

Cyclical Unemployment:

Answer 44

The type of unemployment that results from economic downturns or recessions. It occurs when there is a decrease in overall demand for goods and services, leading to reduced production and job losses.

Question 45

Real Wage:

Answer 45

The wage rate adjusted for inflation, reflecting the purchasing power of the income earned by workers. It represents the amount of goods and services that can be bought with the nominal wage.

Question 46

Real Income:

Answer 46

The income of individuals or households adjusted for inflation. It shows the purchasing power of the income received, indicating how much can be bought in terms of goods and services.

Question 47

Inflation Rate:

Answer 47

The percentage increase in the general level of prices of goods and services over a specific period, usually measured annually. It reflects how much prices have risen and how purchasing power has changed.

Question 48

Shoe-Leather Costs:

Answer 48

The costs associated with reducing cash holdings and making more frequent trips to the bank due to inflation. It refers to the inconvenience and costs incurred from having to manage cash more frequently in a high-inflation environment.

Question 49

Menu Costs:

Answer 49

The costs to firms of changing prices, such as printing new menus or updating price lists, are due to inflation. It represents the administrative and operational expenses related to adjusting prices.

Question 50

Unit-of-Account Costs:

Answer 50

The costs arise from the confusion and distortion caused by inflation when money’s role as a measure of value is compromised. It affects how well money can serve as a consistent measure for pricing and valuing goods and services.

Question 51

Nominal Interest Rate:

Answer 51

The interest rate expressed in current dollars, is not adjusted for inflation. It is the percentage increase in money paid to lenders or received from borrowers.

Question 52

Real Interest Rate:

Answer 52

The interest rate is adjusted for inflation, reflecting the true cost of borrowing or the true return on investment. It is calculated by subtracting the inflation rate from the nominal interest rate.

Question 53

Disinflation:

Answer 53

A decrease in the rate of inflation means that prices are still rising but at a slower rate. It indicates a slowdown in the rate at which inflation is increasing.

Question 54

Aggregate Price Level:

Answer 54

The overall level of prices for all goods and services in an economy. It represents the average price of a broad range of products and services and is used to gauge inflation and economic stability.

Question 55

Market Basket:

Answer 55

A collection of goods and services that is used to track changes in the price level over time. The market basket is a representative sample of items typically purchased by households and is used to calculate price indices.

Question 56

Price Index:

Answer 56

A statistical measure that reflects changes in the price level of a selected set of goods and services over time. It is used to compare the current price level to a base period, helping to track inflation or deflation.

Question 57

Consumer Price Index (CPI):

Answer 57

A price index that measures the average change in prices paid by consumers for a fixed basket of goods and services over time. The CPI is widely used to assess changes in the cost of living and inflation rates.

Question 58

Producer Price Index (PPI):

Answer 58

A price index that measures the average change in selling prices received by domestic producers for their output over time. It reflects changes in wholesale prices before they reach consumers and can signal future consumer price changes.

Question 59

GDP Deflator:

Answer 59

A measure of the overall change in prices for all goods and services included in Gross Domestic Product (GDP). It is used to convert nominal GDP (measured in current prices) into real GDP (measured in constant prices) by accounting for inflation.