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AP Macroeconomics Complete Content Review

Terms in this set (99)

absolute advantage
the ability to produce a good using fewer inputs than another producer
comparative advantage
the ability to produce a good at a lower opportunity cost than another producer; basis for international trade
terms of trade
the ratio at which a country can trade its exports for imports from other countries
GATT (General Agreement on Tariffs and Trade)
international agreement first signed in 1947 aimed at lowering trade barriers
European Union
an association of European nations formed in 1993 for the purpose of achieving political and economic integration.
Eurozone
the group of European Union nations whose national currency is the euro.
NAFTA (North American Free Trade Agreement)
An agreement for free trade between the United States and Canada and Mexico
WTO (World Trade Organization)
organization through which member nations negotiate trading agreements and resolve disputes about trade policies and practices
Tariff
A government tax on imports or exports
nontarrif barriers
all impediments other than protective tariffs that nations establish to impede imports, including quotas, licensing requirements, unreasonable product quality standards, etc.
Protective Tariff
An excise tax on imported goods that raises the price of imports so people will buy domestic goods
revenue tariff
tax on imports used primarily to raise government revenue without restricting imports
import quota
a limit on the number of products in certain categories that a nation can import
Military Self-Sufficiency Argument
The argument is that the country cannot be dependent on other countries for its national defense
infant industry argument
New industries in developing countries must be temporarily protected from international competition to help them reach a position where they can compete on world markets with the firms of developed nations.
Dumping
selling products in a foreign country at lower prices than those charged in the producing country
Cheap Foreign Labor Argument
argument that low wages in competing countries harm domestic production
excise tax
a tax on the production, sale, or consumption of goods produced within a country
MV=PQ
equation of exchange; money supply x velocity = nominal GDP
fractional reserve banking
a banking system that keeps only a fraction of funds on hand and lends out the remainder
liabilities
on a bank's t-account, demand deposits will go here
assets
on a bank's t-account, loans will go here
excess reserves
a bank's reserves over and above its required reserves; basis for how much a bank can lend
Federal Funds Rate (FFR)
the interest rate that banks charge one another to borrow money
discount rate
The interest rate on the loans that the Fed makes to banks
Federal Reserve
it issues our paper currency and determines monetary policy
100
money multiplier if the RRR is 1%
20
money multiplier if the RRR is 5%
10
money multiplier if the RRR is 10%
5
money multiplier if the RRR is 20%
1/RRR
formula for money multiplier
open market operations
the purchase and sale of U.S. government bonds by the Fed
Buy bonds, lower discount rate, lower reserve requirement
Fed strategies to combat recession
Sell bonds, raise discount rate, raise reserve requirement
Fed strategies to combat inflation
Deposit-reserve requirement
formula for determining excess reserves
excess reserves x money multiplier
formula for determining the maximum change in demand deposits from a deposit
business cycle
They are caused by unexpected changes in total spending, which are often caused by shocks. Recurring increases and decreases in the level of economic activity over periods of years; consists of peak, recession, trough, and expansion phases
peak
The point in a business cycle at which business activity has reached a temporary maximum; the economy is near or at full employment and the level of real output is at or very to the economy's capacity
recession
A period of declines in real GDP, accompanied by lower real income and higher unemployment
trough
The point in a business cycle at which business activity has reached a temporary minimum; the point at which a recession has ended and an expansion (recovery) begins
expansion
A phase of the business cycle in which real GDP, income, and employment rise
Sources of shock that can cause business cycles:
Irregular Innovation; Productivity changes; Monetary factors; Political events; Financial instability
Inflation
A rise in the general level of prices in an economy
Consumer Price Index
CPI; An index that measures the prices of a fixed "market basket" of some 300 goods and services bought by a "typical" consumer
Nominal or current GDP
has not been adjusted for inflation
Real GDP
GDP adjusted for inflation
Real GDP per capita
real GDP divided by the total population
Fear and Confidence
human emotions that contribute to the fluctuations in the business cycle
2 quarters of negative GDP growth
indicates a recession
Rule of 70
A method for determining the number of years it will take for some measure to double, given its annual percentage increase. Example: To determine the number of years it will take for the price level to double.
recession and expansion
two main phases of business cycle
2007-2009
Great Recession
(Nominal GDP/Price Index) x 100
Real GDP formula
Economics
The social science concerned with how individuals, institutions, and society make optimal (best) choices under conditions of scarcity.
Scarcity
A situation in which unlimited wants exceed the limited resources available to fulfill those wants
Opportunity costs
Goods and services that are sacrificed to produce resources. In choosing the best option, people incur an opportunity cost-the value of the next-best option. Gates gave up college to found Microsoft. Oprah Winfrey dropped out of college to continue her broadcast career and launch her show.
Marginal analysis
Comparison of marginal benefits and marginal costs, usually for decision making. MB (utility); MC (added expense).
Scientific method
Economic relies on the scientific method--observing real-world behavior and outcomes; hypothesis; testing data; making a conclusion.
other-things-equal assumption (ceteris paribus)
The assumption that factors other than those being considered do not change.
Microeconomics
The part of economics concerned with decision making by individual customers, workers, households, and business firms. Microeconomics focuses on specific decision-making units of the economy.
Macroeconomics
Examines either the economy as a whole or its basic subdivisions or aggregates, such as the government, household, and business sectors. Macroeconomics focuses on the economy as a whole.
Aggregate
A collection of specific economic units treated as if they were one unit.
Positive economics
Focuses on the facts and cause-and-effect relationships. Avoids value judgements. Scientific based analysis. Looks at what is. FACTS.
Normative economics
Incorporates value judgements about what the economy should be like or what policy actions should be recommended to achieve a desirable goal; looks at what ought to be. OPINION.
Economic resources
All natural, human, and manufactured resources that go into the production of goods and services.
Four categories of economic resources (a.k.a. factors of production or inputs)
Land, labor, capital, and entrepreneurial ability
Land
All natural resources--gifts of nature--used in the production process, e.., forests, mineral and oil-deposits, water resources, wind power, sunlight, and arable land. Arable land is land capable of being plowed and used to grow crops.
Labor
The physical actions and mental activities that people contribute to the production of goods and services.
Capital or capital goods
All manufactured aids used in producing goods and services; not same as money. Capital includes, e.g., all factory, storage, transportation, and distribution facilities, as well as tools and machinery.
Entrepreneurial ability
Special human resource, distinct from labor--the entrepreneur is driving force in successful business who makes business decisions, innovates, takes risks.
Production possibilities curve
Simplest model-Full employment; fixed resources, fixed technology; two goods
Law of increasing opportunity costs
As the production of a particular good increases, the opportunity cost of producing an additional unit rises.
Unemployment
Unemployment causes an economy to operate at a point inside its production possibilities curve.
Economic growth
A larger total output: increases in resource supplies, improvements in resource quality and technological advance cause economic growth, which is depicted as an outward sift of the production possibilities curve.
International specialization and trade
Two factors that enable a nation to obtain more goods than its production possibilities curve indicates.
Optimal best point on production possibilities curve
The optimal best point on the PPC represents the most desirable mix of goods and is determined by expanding the production of each good until its marginal benefit (MB) equals it marginal cost (MC).
Marginal benefit
The additional satisfaction or utility that a person receives from consuming an additional unit of a good or service. A person's marginal benefit is the maximum amount they are willing to pay to consume that additional unit of a good or service.
Marginal cost
the cost added by producing one additional unit of a product or service.
Production Possibilities Model Assumptions
Fixed Resources, Fixed Technology, Full Employment, Two Goods
circular flow model
circular flow model model that shows the flow of resources, products, and money in our economy
households
In the circular flow model, they own/sell the factors of production and buy products
firms or businesses
In the circular flow model, they sell products and buy the factors of production
a set of institutions and a coordinating mechanism to respond to the economizing problem
economic system
laissez-faire capitalism
also known as pure capitalism; markets direct economic activity and there is a very limited role for government in the economy
command economy
system that relies on public ownership of resources and the use of central planning; government makes most economic decisions
market economy
private ownership of resources; markets and prices coordinate economic activity; government plays a role in the economy by providing rules, enforcing contracts, providing public goods; most economies today fall into this category
market
a place, institution, or process where buyers and sellers interact with each other
Specialization
a process in which an individual or business completes one task repetitively and develops expertise in that task; increases productive efficiency
division of labor
a means of specialization; a large task is broken down into several smaller tasks
the 5 fundamental questions for each economic system
1. what to produce; 2. how to produce; 3. who gets what we produce; 4. how will we accommodate change; 5. how will we promote progress?
Invisible Hand
the combined force of each individual promoting their own interests yet serving the economy as a whole
creative destruction
new technology that makes old technology obsolete, useless
Sole Proprietorship
a business owned and operated by one person
partnership
a business owned and operated by two or more people
corporation
a business owned by stockholders and run by a board of directors
consumer sovereignty
the idea that the consumer in a market economy holds the ultimate power, deciding what will be produced
dollar votes
consumers choose what will be produced in a market economy by purchasing goods and services, sending a signal to produce more or less of a good
TINSTAAFL
There Is No Such Thing As A Free Lunch; everything has a cost
Adam Smith
Scottish moral philosopher and a pioneer of political economics. Seen today as the father of Capitalism. Wrote On the Wealth of Nations (1776) One of the key figures of the Scottish Enlightenment.
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