Unit I & II vocab

Question 1

Gross domestic product (GDP)

Answer 1

The market value of all final goods and services produced within a country during a specific period.

Question 2

Intermediate goods

Answer 2

Goods purchased for resale or for use in producing another good or service.

Question 3

Final market goods and services

Answer 3

Goods and services purchased by their ultimate user.

Question 4

Expenditure approach to derive GDP

Answer 4

Total the expenditures on goods and services produced during the year

Question 5

Resource cost-income approach to derive GDP

Answer 5

Sum the income payments to resource suppliers of all things used to produce those goods or services.

Question 6

Personal consumption

Answer 6

Household spending on consumer goods and services during the current period. Consumption is a flow concept.

Question 7

Private investment

Answer 7

The flow of private-sector expenditures on durable assets (fixed investments) plus the addition of inventories (inventory investments) during a period. The expenditures enhance our ability to provide consumer benefits in the future.

Question 8

Depreciation

Answer 8

The estimated amount of physical capital (for example, machines and buildings) that is worn out or used up producing goods during a period.

Question 9

Inventory investments

Answer 9

Changes in the stock of unsold goods and raw materials held during a period.

Question 10

Net exports

Answer 10

Exports minus imports

Question 11

Exports

Answer 11

Good and services produced domestically but sold to foreigners

Question 12

Imports

Answer 12

Good and services produced by foreigners but purchased by domestic consumers, businesses and governments.

Question 13

Indirect business taxes

Answer 13

Taxes that increase a business firm’s costs of production and, therefore, the price charged to consumers. Examples are sales, excise, and property taxes.

Question 14

National income

Answer 14

The total income earned by a country’s nationals (citizens) during a period. It is the sum of employee compensation, self-employment income, rents, interest, and corporate profits.

Question 15

Gross national product

Answer 15

The total market value of all final goods and services produced by the citizens of a country. It is equal to the GDP minus the net income of foreigners.

Question 16

Net income of foreigners

Answer 16

The income of foreigners earn by contributing labor and capital resources to the production of goods within the borders of a country minus the income the nationals of the country earn abroad.

Question 17

Nominal values

Answer 17

Values expressed in current dollars. Often call money values.

Question 18

Real values

Answer 18

Values that have been adjusted for the effects of inflation.

Question 19

Consumer price index (CPI)

Answer 19

An indicator of the general level of prices. It attempts to compare the cost of purchasing the market basket bought by a typical consumer during a specific period with the cost of purchasing the same market basket during an earlier period.

Question 20

Chained consumer price index

Answer 20

A measure of the consumer price index that accounts for changes in the market basket of goods bought on a monthly basis rather than on a lagged basis as done with the traditional CPI. This change reduces the annual inflation rate by 0.2 to 0.3 percentage points.

Question 21

GDP deflator

Answer 21

A price index that reveals the cost during the current period of purchasing the items included in the GDP relative to the cost during a base year (currently 2012). Unlike the consumer price index (CPI), the GDP deflator also measures the prices of capital goods and other goods and services purchased by businesses and governments.

Question 22

Inflation

Answer 22

An increase in the general level of prices of goods and services. The purchasing power of the monetary unit, such as the dollar, declines when inflation is present.

Question 23

Nominal GDP

Answer 23

GDP expressed at current prices. It is often called money GDP.

Question 24

Real GDP

Answer 24

GDP adjusted for changes in the price level.

Question 25

Underground economy

Answer 25

Unreported barter and cash transactions that take place outside recorded market channels. Some are otherwise legal activities undertaken to avoid taxes. Others involve illegal activities such as trafficking drugs and prostitution.

Question 26

Per capita GDP

Answer 26

Income per person. Increases in income per person are vital for the achievement of higher living standards.

Question 27

Rule of 70

Answer 27

If a variable grows at a rate of X percent per year, 70/X will approximate the number of years required for the variable to double.

Question 28

Technological advancement

Answer 28

The introduction of new techniques or methods that increase output per unit of input.

Question 29

Institutions

Answer 29

The legal, regulatory, and social constraints that affect the security of property rights and enforcement of contracts. They exert a major impact on the incentive to engage in productive activities, innovate, and realize gains from trade,

Question 30

Less-developed countries

Answer 30

Countries with low per capita incomes, low levels of education, widespread illiteracy, and widespread use of production methods that are largely obsolete in high-income countries. They are sometimes referred to as developing countries.

Question 31

What are the sources of economic growth and high incomes?

Answer 31

Gains from trade
The institutional environment
Entrepreneurship, technology, and the discovery of better ways of doing things
Investment in physical and human capital

Question 32

What institutions and polices will promote growth?

Answer 32

Legal system
Competitive market
Stable money and prices
Minimal regulation
Trade openness

Question 33

What legal system promote growth?

Answer 33

Secure property rights, rule of law, and even-handed enforcement of contracts

Question 34

What competitive markets promote growth?

Answer 34

Freedom of entry into business and occupations

Question 35

What about stable money and prices promotes growth?

Answer 35

Low and predictable rates of inflation

Question 36

Which regulations should be avoided to promote growth?

Answer 36

Regulations that restrict entry and interfere with voluntary exchanges.

Question 37

What should be avoided to promote trade openness and growth?

Answer 37

Tariffs, quotas, and other regulations that restrict residents from trading with people in other countries.

Question 38

Purchasing power parity (PPP) method

Answer 38

Method in which the relative purchasing power of each currency is determined by comparing the amount of each currency required to purchase a common bundle of goods and services in the domestic market. The information is then used to convert the GDP of each nation to a common monetary unit like the U.S. dollar.

Question 39

Economic freedom

Answer 39

Method of organizing economic activity characterized by 1) personal choice, 2) voluntary exchange coordinated by markets, 3) freedom to enter and compete in markets, and 4) protection of people and their property from aggression by others.

Question 40

Quartile

Answer 40

A quarter (25 percent) of a group. The quartiles are often arrayed on the basis of an indicator like income or degree of economic freedom.

Question 41

Democracy

Answer 41

A form of political organization in which adult citizens are free to participate in the political process (vote, lobby, and choose among candidates), elections are free and open, and majority voting, either directly or by elected representative, decides outcomes.

Question 42

Four major components of GDP when derived by the expenditure approach

Answer 42

1. personal consumption
2. gross private investment
3. government consumption and gross investment
4. net exports

Question 43

Direct income components of GDP derived by the resource cost-income approach

Answer 43

wages and salaries
self-employment income
rents
interest
corporate profits

Question 44

Indirect components of GDP derived by the resource cost-income approach

Answer 44

indirect business taxes
depreciation
net income to foreigners

Question 45

What are the most widely used price indexes?

Answer 45

The GDP deflator
The consumer price index (CPI)

Question 46

What is the equation for rate of inflation?

Answer 46

(PI2-PI1)/PI1 x 100%

Question 47

What is the equation for converting nominal GDP to real GDP?

Answer 47

Real GDP2=Nominal GDP2 x GDP deflator 1/GDP deflator 2

Question 48

What are the three major sources of economic progress?

Answer 48

1. gains from trade and expansion in the size of the market
2. discover of new technologies and innovated applications
3. investment in physical and human capital