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national income accounting

measures the economy's overall performance.; helps a country plot its future strategy.

intermediate goods

Are goods and services that are purchased for resale or for further processing or manufacturing.

final goods

Are consumption goods, capital goods, and services that are purchased by their final users, rather than for resale or for further processing or manufacturing.

multiple counting

This distorts the value of GDP, because it takes into account goods more than one time.; ex) only final goods included ion GDP because intermediate goods are already included in final goods.

value added

Is the market value of a firm's output minus the value of the inputs the firm has brought from others.

expenditures approach

Is the view of GDP as the sum of all money spent in buying it.

income approach

Is the view of GDP as the income derived or created from producing it. (AKA earnings/allocation approach)

personal conumption expenditures (C)

Is all expenditures by households on durable consumer goods, nondurable goods, and consumer expenditures for services.

gross private domestic investment

is the total investment that includes final purchases of machinery, equipment, and tools by business enterprises, all construction, and change in inventories.

net private domestic investment

This includes only investment in the form of added capital. aka net investment =gross investment-depreciation (capital that is used up).

government purchases (G)

Is government consumption expenditures and gross investment.

net exports (Xn)

Is equal to exports minus imports. pg132

taxes on production and imports

Are general sales taxes, excise taxes, business property taxes, license fees, and customs duties.

national income

Is the total of all sources of private income (employee compensation, rents, interest, propietor's income, and corporate profits) plus government revenue from taxes on production and imports.

consumption of fixed capital

Is the huge depreciation charge made against private and publicly owned capital each year. It is the allowance for capital that has been consumed in producing the year's GDP.

net domestic product (NDP)

Is what we get when we subtract the capital that was consumed in producing the GDP and that had to be replaced from the GDP. ex. NDP=GDP-consumption of capital.

personal income (PI)

This includes all income received, whether earned or unearned. This differs from national income as some income is not received by households.

disposable income (DI)

Is personal income minus personal taxes. Its the money left over that households have after personal taxes.

price index

Is a measure of the price of a specified collection of goods and services, called a "market basket", in a given year as compared to the price of an identical collection of goods and services in a reference year.

economic growth

Is an increase in real GDP occurring over some period of time or an increase in real GDP per capita occurring over some time.

real GDP per capita

This is found by dividing real GDP by the size of the population.

rule of 70

This is a mathematical approximation that tells us that we can find the number of years it will take for some measure to double, given its annual percentage increase, by dividing that percent into the number 70.

modern economic growth

This is characterized by sustained and ongoing increases in living standards that can cause dramatic increases in the standard of living within less than a single human lifetime.

leader countries

Are rich countries that typically grows by an average annual rate of 2-3%/year because they have to develope new technology.

follower countries

Are poorer countries and typically grow faster than rich countries because they just adopt the rich countries technology.

supply factors

Are changes in the physical and technical agents of production and enable an economy to expand its potential GDP.

demand factor

Is the fifth ingredient of economic growth and is when households, businesses, and government must purchase the economy's expanding output of goods and services.

efficiency factor

Sixth ingredient of economic growth and is when an economy must achieve economic efficiency as well as full employment.

labor productivity

Is the measure of real output per hour of work.

labor-force participation rate

Is the percentage of the working-age population actually in the labor force.

growth accounting

Is system used by the council of Economic Advisors that asses the relative importance of the supply-side elements that contribute to changes in real GDP.


includes highways and bridges, public transit systems, wastewater treatment facilities, water systems, airports, educational facilities etc...

human capital

Is the knowledge and skills that make a worker productive.

economies of sale

Are reductions in per-unit production costs that result from increases in output levels.

information technology

Is used to connect word together and includes the computer, fiber-optic cable, wireless technology, and the internet.

start-up firms

Are new firms with many creating more hype than goods and often failing while some flourish.

increasing returns

Is a situation in which a given percentage increase in the amount of inputs a firm uses leads to an even larger percentage increase in the amount of output the firm produces.

network effects

Are increases in the value of the product to each user, including existing users, as the total number of users rises. ex. internet->email, software->attach photos/documents.

learning by doing

Is when firms produce new products or pioneer new ways of doing business experience increasing returns. reduces time it takes to do a task when these methods are perfected.

business cycles

Are alternating rises and declines in the level of economic activity, sometimes over several years.


Is part of the business cycle in which business activity has reached a temporary maximum.


Is a period of decline in total output.


Is part of the business cycle in which output and employment "bottom out" at their lowest levels.


Is a period in which real GDP, income, and employment rise.

labor force

This consists of people who are able and willing to work.

unemployment rate

Is the percentage of the labor force unemployed. (=unemployed/labor force).

discouraged workers

Is when workers, after unsuccessfully seeking employment for a time, become discouraged and drop out of the labor force.

frictional unemployment

Consists of search unemployment and wait unemployment, for workers who are either searching for jobs or waiting to take jobs in the near future.

structural unemployment

Is when workers find that their skills and experience have become obsolete or unneeded thus find that they have no marketable talents and need to develop new ones.

cyclical unemployment

Is unemployment that is caused by a decline in total spending;

full-employment rate of unemploment

Same as NRU; is the employment rate that is consistent with full employment.

natural rate of unemployment (NRU)

same as full-employment rate of unemployment; is the employment rate that is consistent with full employment.

potential output

This is the reall GDP that occurs when the economy is "fully employed".

GDP gap

Is the difference between actual and potential GDP.

Okun's law

Indicates that for every 1 percentage point by which the actual unemployment rate exceeds the natural rate, a negative GDP gap of about 2 percent occurs.


Is a rise in the general level of prices.

consumer price index (CPI)

Is the main measure of inflation in the US and the government uses this to report inflation rates each month and each year.

demand-pull inflation

Is inflation that is caused by an excess of total spending beyond the economy's capacity to produce.

cost-push inflation

Is inflation that is caused by rising prices in terms of factors that raise per-unit production costs at each level of spending.; imported raw materials price's increase causing inflation.; self limiting.

per-unit production costs

Is the average cost of a particular level of output.

nominal income

Is the number of dollars received as wages, rent, interest, or profits.

real income

Is a measure of the amount of goods and services nominal income can buy; income adjusted for inflation.

unanticipated inflation

not expected inflation that causes real income and wealth to be redistributed, harming some and benefiting others.

anticipated inflation

expected inflation and allows people to plan ahead, and are able to avoid or lessen the redistribution effects associated with inflation.

cost-of-living adjustments (COLAs)

Is a benefit that automatically increases when the CPI increases, preventing erosion of benefits from inflation (loss of benefit).

real interest rate

Is there percentage increase in purchasing power that the borrower pays the lender.


Is the decrease in price level; opposite of inflation and its effects; people w/ fixed incomes find their real incomes enhanced and creditors will benefit over debtors.


Is the extraordinarily rapid inflation, and can have devastating impact on real output and employment.

public transfer payments

Are the social security payments, welfare payments, and veterans' payments that the government makes directly to households.

Private transfer payments

Is the money that parents give their children or the cash gifts given at christmas time.

Stock market transactions

The buying or selling of stocks (and bonds) is just a matter of swapping bits of paper.

In a competative market:

resources will be misallocated if government does not properly adjust demand and supply for large external costs and benefits.

The owners of a firm face unlimited liability for the firms debts in:

both a proprietorship and a partnership.

Many economists believe that the widespread use of computerized inventory control systems:

Has contributed to a reduced severity of the business cycle.

The tax rates embodied in the Federal personal income tax are such that:

The marginal tax rate is higher than the average tax rate, causing the average rate to rise.

The primary economic advantage of the EU has to its members is:

the reduction of trade barriers permits producers to achieve mass-production economies.

For an economy to increase investment it must:

increase savings.

The coincidence-of-wants problem associated with barter refers to the fact that:

For exchange to occur each seller must have a product that some buyer wants.

Which will not produce an outward shift in the PPC:

the reduction of unemployment.

Which of the following is a normative statement?

It is too hot to play tennis today. Its a judgment call that is directly or indirectly asking for approval or disapproval (opinion)

Which of the following is a capital resource?

A piece of software used by a firm.

If you leave a football game early you will get home early/quickly. Therefore everyone should leave the game early to get home more quickly. What does this example define?

fallacy of composition

the business cycle

This refers to economy-wide short run fluctuations in production or economic activity over several months or years.


Is when output and living standards decline.

real GDP (gross domestic product)

This measures the value of final goods and services produced within the borders of a given country during a given period of time (usually a yr).

nominal GDP

Is the total dollar value of all goods and services produced within the borders of a given country using their current prices during the year that they were produced.


Is the state a person is in if he or she cannot get a job despite willing to work and actively seeking work.


Is an increase in the overall level of prices.

modern economic growth

Is when the countries output increases faster than the population size; An increase in living standards.


Is when consumption is less than current output or when spending is less than current income.


This happens when resources are devoted to increasing future output.

financial investment

Is the purchases of assets like stocks, bonds, and real estate in the hope of reaping a financial gain.; its what most people capture when they say investment.

economic investment

This has to do with the creation and expansion of business enterprises.


Is what firms are prediction future trend to be.


situations in which firms were expecting one thing to happen but then something else happens.

demand shocks

Are unexpected changes in the demand for goods and services.

supply shocks

Are unexpected changes in the supply for goods and services.


Is a store of output that has been produced but not yet sold.

inflexible prices

is when prices in th economy are not able to change rapidly when demand or supply change unexpectedly.; sticky prices.

flexible prices

Is when economy prices can change when demand and supply change unexpectedly.;

comparative advantage

Is when the comparative costs of two products within the two nations are different. p.97 US>Mex. cuz US must forgo 3 avacados for 1 soybean where as mexico must forgo 4.

terms of trade

Are negotiations between two countries that develop exchange rates for products and is mutually beneficial to both countries.

foreign exchange market

Is a market in which various national currencies are exchanged for one another.

exchange rates

Is the rate at which the currency of one nation can be exchanged for the currency of another nation.


Is when the value of the dollar decreases or the dollar price of another countries currency increases.


Is when the value of the dollar increases, or when the dollar price of another countries currency decreases.

protective tariffs

Are excise taxes placed on imported goods.

import quotas

Are limits on the quantities or total value of specific items that may be imported.

nontariff barriers

Includes onerous licensing requirements, unreasonable standards pertaining to product quality, or simply bureaucratic hurdles and delays in customs procedures.

export subsidies

Are governments payments to domestic producers of export goods. Used to reduce production costs and enable producers to charge lower prices and sell more exports.

smoot-hawley tariff act

Was a high tariif that was intended to reduce imports and stimulate US production but back fired causing other nations to retaliate with tariffs of their own, which caused a decline in international trade.

Reciprocal Trade Agreement Act

Was created with the aim at reducing tariffs by negotiating authority (president negotiations) and Generalized reductions (reductions to all NTR nations).;;; Only between two nations.

normal-trade-relations (NTR) status

Is a status that is awarded by one nation to another, which means that the receiving nation will be granted all trade advantages.

General Agreement of Tariffs and Trade (GATT)

The broadened idea of the reciprocal trade agreement act for multiple nations; Three principles: 1) equal, nondisctiminatory trade treatment for all members, 2) the reduction of tariffs by multilateral negotiation, and 3) the elimination of import quotas.

World Trade Organization (WTO)

It oversees trade agreements reached by member nations. GATTS' successor from the Uruguay Round GATT.

Doha Round

Is the latest round of WTO and is aimed at further reducing tariffs and quotas, as well as agricultural subsidies that distort trade.

European Union (EU)

Is a trade bloc whose members are mainly European nations. has 27 countries today.

trade bloc

A group of countries having a common identity, economic interests and trade rules. They are aka free-trade-zones.


Is the currency of the European Union.

North American Free Trade Agreement (NAFTA)

Is a trade bloc that has the same output as the EU and comprises Canada, Mexico, and the US.

Trade Adjustment Assistance Act

This helps those who are hurt by shifts in international trade patterns and provides cash assistance for up to 78 weeks for workers who are displaced by imports, or plant relocations abroad.


Is when firms and businesses shifts work previously done by American workers to workers located in other nations. Done due to increased profits.

functional distribution of income

This indicates how the nation's income is apportioned among wages, rents, interest, and profits, that is, according to the function performed by the income receiver.

personal distribution of income

This indicates how the nation's total income is divided among individual households.

durable goods

Products that have expected lives of three years or more.

nondurable goods

Products that have lives of less than three years.


Is the work done by lawyers, barbers, doctors, lodging personnel, and so on.


Is a physical establishment (factory, farm, mine, store, or warehouse) that performs one or more functions in fabricating and distributing goods and services.


Is an organization that employs resources to produce goods and services for profit and operates one or more plants.


Is a group of firms that produce the same, or similar, products.

sole propietorship

Is a business owned and operated by one person.


The form of business organization that is a natural growth of a sole proprietorship; Two or more individuals agree two own and operate a business together.


Is a legal creation that can acquire resources, own assets, produce and sell products, incur debts, extend credit, sue and be sued, and perform the functions of any other type of enterprise.


Is a share in the ownership of a corporation.


Is an IOU, in acknowledgement of a loan, whereby the corporation promises to pay the holder a fixed amount set forth on the bond at some specified future date and other fixed amounts (interest) every year up to the bond's maturity date.

limited liability

Is when personal assets are not at stake if the corporation defaults on debts and so creditors cannot sue the owners of the corporation but can sue the corporation.

principle-agent problem

Is when the interests of the mangers and the wishes of the owners do not coincide. Principles are the stockholders who own the corporation and the agents are the ones who are hired by the principles that run the corporation.


Is when single seller controls an industry.


Occurs when some of the costs or the benefits of a good are passed on to or "spill over to" someone other than the immediate buyer or seller.

negative externalities

Production or consumption costs inflicted on a third party without compensation.

positive externalities

are externalities that appear as benefits to other producers or consumers.

public goods

Are goods that people can simultaneously obtain and includes: GPS, national defense, street lighting, and environmental protection.

free-rider problem

Is when people receive benefits from a public good without having to pay for it.

quasi-public goods

Are goods that include education, streets and highways, police and fire protection, libraries and museums, preventive medicine, and sewage disposal. Government often provides them to avoid the

government purchases

The products purchased directly absorb resources and are a part of the domestic output; Are exhaustive;

transfer payments

The products that do not directly absorb resources or create output; non-exhaustive.

personal income tax

Tax that is levied on taxable income, that is, on the incomes of households and unincorporated businesses after certain exemptions and deductions are taken into account.

marginal tax rate

Is the rate at which the tax is paid on each additional unit of taxable income.

average tax rate

Is the total tax paid divided by the total taxable income.

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