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Economy

The structure of economic activity in a community, a region, a country, a group of countries, or the world

Gross domestic product (GDP)

The market value of all final goods and services produced in the nation during a particular period, usually a year

Gross world product

The market value of all final goods and services produced in the world during a given period, usually a year

Flow variable

A measure of something over an interval of time, such as your income per week

Stock variable

A measure of something at a particular point in time, such as the amount of money you have with you right now

Mercantilism

The incorrect theory that a nation's economic objective should to be to accumulate precious metals in the public treasury; this theory prompted trade barriers to cut imports, but other countries retaliated, reducing trade and the gains from specialization

Expansion

A period during which the economy grows as reflected by rising output, employment, income, and other aggregate measures

Contraction

A period during which the economy declines as reflected by falling output, employment, income, and other aggregate measures

Depression

A severe and prolonged reduction in economic activity as occurred during the 1930s

Recession

A period of decline in economic activity lasting more than a few months, as reflected by falling output, employment, income, and other aggregate measures

Inflation

An increase in the economy's average price level

Leading economic indicators

Variables that predict, or lead to, a recession or recovery; examples include consumer confidence, stock market prices, business investment, and big-ticket purchases, such as automobiles and homes

Coincident economic indicators

Variables that reflect peaks and troughs in economic activity as they occur; examples include employment, personal income, and industrial production

Lagging economic indicators

Variables that follow, or trail, changes in overall economic activity; examples include the interest rate and the average duration of unemployment

Aggregate output

A composite measure of all final goods and services produced in an economy during a given period; real GDP

Aggregate demand

The relationship between the economy's price level and aggregate output demanded, with other things constant

Price level

A composite measure reflecting the prices of all goods and services in the economy relative to prices in a base year

Real gross domestic product (GDP)

The economy's aggregate output measured in dollars of constant purchasing power

Aggregate demand curve

A curve representing the relationship between the economy's price level and real GDP demanded per period, with other things constant

Aggregate supply curve

A curve representing the relationship between the economy's price level and real GDP supplied per period, with other things constant

Federal budget deficit

A flow variable measuring the amount by which federal government outlays exceed federal government revenues in a particular period, usually a year

Demand-side economics

Macroeconomic policy that focuses on shifting the aggregate demand curve as a way of promoting full employment and price stability

Supply-side economics

Macroeconomic policy that focuses on a rightward shift of the aggregate supply curve through tax cuts or other changes to increase production incentives

Federal debt

A stock variable that measures the net accumulation of annual federal deficits

Expenditure approach to GDP

Calculating GDP by adding up spending on all final goods and services produced in the nation during the year

Income approach to GDP

Calculating GDP by adding up all earnings from resources used to produce output in the nation during the year

Final goods and services

Goods and services sold to final, or end, users

Intermediate goods and services

Goods and services purchased by firms for further reprocessing and resale

Double counting

The mistake of including both the value of intermediate products and the value of final products in calculating GDP; counting the same production more than once

Consumption

Household purchases of final goods and services, except for new residences, which count as investment

Investment

The purchase of new plants, equipment, buildings, and residences, plus net additions to inventories

Physical capital

Manufactured items used to produce goods and services; includes new plants and new equipment

Residential construction

Building new homes or dwelling places

Inventories

Producers' stocks of finished and in process goods

Government purchases

Spending for goods and services by all levels of government; government outlays minus transfer payments

Net exports

The value of a country's exports minus the value of its imports

Aggregate expenditure

Total spending on final goods and services in an economy during a given period, usually a year

Aggregate income

All earnings of resource suppliers in an economy during a given period, usually a year

Value added

At each stage of production, the selling price of a product minus the cost of intermediate goods purchased from other firms

Disposable income (DI)

The income households have available to spend or to save after paying taxes and receiving transfer payments

Net taxes (NT)

Taxes minus transfer payments

Financial markets

Banks and other financial institutions that facilitate the flow of funds from savers to borrowers

Injection

Any spending other than by households or any income other than from resource earnings; includes investment, government purchases, exports, and transfer payments

Leakage

Any diversion of income from the domestic spending stream; includes saving, taxes, and imports

Underground economy

Market transactions that go unreported either because they are illegal or because people involved want to evade taxes

Depreciation

The value of capital stock used up to produce GDP or that becomes obsolete during the year

Net domestic product

GDP minus depreciation

Nominal GDP

GDP based on prices prevailing at the time of production

Base year

The year with which other years are compared when constructing an index; the index equals 100 in the base year

Price index

A number that shows the average price of products; changes in a price index over time show changes in the economy's average price level

Consumer price index, CPI

A measure of inflation based on the cost of a fixed market basket of goods and services

GDP price index

A comprehensive inflation measure of all goods and services included in the GDP

Chain-weighted system

An inflation measure that adjusts the weights from year to year in calculating a price index, thereby reducing the bias caused by a fixed price weighting system

Labor force

Those 16 years of age and older who are either working or looking for work

Unemployment rate

The number unemployed as a percentage of the labor force

Discouraged workers

Those who drop out of the labor force in frustration because they can't find work

Labor force participation rate

The labor force as a percentage of the adult population

Frictional unemployment

Unemployment that occurs because job seekers and employers need time to find each other

Seasonal unemployment

Unemployment caused by seasonal changes in the demand for certain kinds of labor

Structural unemployment

Unemployment because 1. the skills demanded by employers don't match those of the unemployed, or 2. the unemployed don't live where the jobs are

Cyclical unemployment

Unemployment that fluctuates with the business cycle, increasing during contractions and decreasing during expansions

Long-term unemployed

Those out of work for 27 weeks or longer

Full employment

Employment level when there is no cyclical unemployment

Unemployment benefits

Cash transfers to those who lose their jobs and actively seek employment

Underemployment

Workers are overqualified for their jobs or work fewer hours than they would prefer

Hyperinflation

A very high rate of inflation

Deflation

A sustained decrease in the price level

Disinflation

A reduction in the rate of inflation

Demand-pull inflation

A sustained rise in the price level caused by a rightward shift of the aggregate demand curve

Cost-push inflation

A sustained rise in the price level caused by a leftward shift of the aggregate supply curve

Interest

The dollar amount paid by borrowers to lenders

Interest rate

Interest per year as a percentage of the amount loaned

Nominal interest rate

The interest rate expressed in dollars of current value (that is, not adjusted for inflation) as a percentage of the amount loaned; the interest rate specified on the loan agreement

Real interest rate

The interest rate expressed in dollars of constant purchasing power as a percentage of the amount loaned; the nominal interest rate minus the inflation rate

COLA

Cost-of-living adjustment; an increase in a transfer payment or wage that is tied to the increase in the price level

Productivity

The ratio of a specific measure of output, such as real GDP, to a specific measure of input, such as labor; in this case productivity measures real GDP per hour of labor

Labor productivity

Output per unit of labor; measured as real GDP divided by the hours of labor employed to produce that output

Per-worker production function

The relationship between the amount of capital per worker in the economy and average output per worker

Capital deepening

An increase in the amount of capital per worker; one source of rising labor productivity

Rules of the game

The formal and informal institutions that promote economic activity; the laws, customs, manners, conventions, and other institutional elements that determine transaction costs and thereby affect people's incentive to undertake production and exchange

Industrial market countries

Economically advanced capitalist countries of Western Europe, North America, Australia, New Zealand, and Japan, plus the newly industrialized Asian economies of Taiwan, South Korea, Hong Kong, and Singapore

Developing countries

Countries with a low living standard because of less human and physical capital per worker

Basic research

The search for knowledge without regard to how that knowledge will be used

Applied research

Research that seeks answers to particular questions or to apply scientific discoveries to develop specific products

Industrial policy

The view that government - using taxes, subsidies, and regulations - should nurture the industries and technologies of the future, thereby giving these domestic industries an advantage over foreign competition

Convergence

A theory predicting that the standard of living in economies around the world will grow more similar over time, with poorer countries eventually catching up with the richer ones

Consumption function

The relationship in the economy between consumption and income, other things constant

Marginal propensity to consume (MPC)

The fraction of a change in income that is spent on consumption; the change in consumption divided by the change in income that caused it

Marginal propensity to save (MPS)

The fraction of a change in income that is saved; the change in saving divided by the change in income that caused it

Saving function

The relationship between saving and income, other things constant

Net wealth

The value of assets minus liabilities

Life-cycle model of consumption and saving

Young people borrow, middle agers pay off debts and save, and older people draw down on their savings; on average, net savings over a lifetime is usually little or nothing

Investment function

The relationship between the amount businesses plan to invest and the economy's income, other things constant

Autonomous

A term that means "independent"; for example, autonomous investment is independent of income

Government purchase function

The relationship between government purchases and the economy's income, other things constant

Net export function

The relationship between net exports and the economy's income, other things constant

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