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235 terms

Midterm

STUDY
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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.
infrastructure
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.
peak
Is part of the business cycle in which business activity has reached a temporary maximum.
recession
Is a period of decline in total output.
trough
Is part of the business cycle in which output and employment "bottom out" at their lowest levels.
expansion
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.
inflation
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.
delfation
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.
hyperinflation
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.
recession
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.
unemployment
Is the state a person is in if he or she cannot get a job despite willing to work and actively seeking work.
inflation
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.
savings
Is when consumption is less than current output or when spending is less than current income.
investment
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.
expectations
Is what firms are prediction future trend to be.
shocks
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.
inventory
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.
depreciation
Is when the value of the dollar decreases or the dollar price of another countries currency increases.
appreciation
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.
euro
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.
offshoring
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.
services
Is the work done by lawyers, barbers, doctors, lodging personnel, and so on.
plant
Is a physical establishment (factory, farm, mine, store, or warehouse) that performs one or more functions in fabricating and distributing goods and services.
firm
Is an organization that employs resources to produce goods and services for profit and operates one or more plants.
industry
Is a group of firms that produce the same, or similar, products.
sole propietorship
Is a business owned and operated by one person.
partnership
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.
corporation
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.
stock
Is a share in the ownership of a corporation.
bond
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.
monopoly
Is when single seller controls an industry.
externality
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.
payroll taxes
Tax based on wages and salaries used to finance two compulsory Federal programs for retired workers: Social security and Medicare.
corporate income tax
Is tax that is levied on a corporation's profit - the difference between its total revenue and its total expenses.
sales and excise taxes
Are taxes on commodities or on purchases.
property taxes
Is an ad valorem tax that an owner is required to pay on the value of the property being taxed.
demand
Is a schedule or a curve that shows the various amounts of a product that consumers are willing and able to purchase at each of a series of possible prices during a specified period of time.
demand schedule
This shows the quantities of a good that will be demanded at various prices.
law of demand
Is a negative or inverse relationship between price and quantity demanded. IE as people buy more product, service, or resource as its price falls.
diminishing marginal utility
Idea that obtaining multiple goods of the same thing the second, third, etc... have a reduced satisfaction compared to the first.
income effect
Indicates that a lower price increases the purchasing power of a buyer's money income, enabling the buyer to purchase more of the product than before.
substitution effect
Indicates that at a lower price buyers have the incentive to substitute what is now a less expensive product for similar products that are now relatively more expensive.
demand curve
Curve that plots price vs quantity with its downward slope reflecting the law of demand.
determinants of demand
Are factors that can and do effect demand. AKA demand shifters. Ex. consumer preferences, # of buyers, income, prices of related goods, and consumer expectations.
normal goods
Products whose demand varies directly with money income.
inferior goods
Products whose demand varies inversely with money income.
substitute goods
Products that can be used in place of another.
complementary goods
Products that is used together with another good.
change in demand
Is a shift of the demand curve to the right (increase in demand) or to the left (a decrease in demand).
change in quantity demanded
Is the movement from one point to another on a fixed demand curve.
supply
Is a schedule or curve showing the various amounts of a product that producers are willing and able to make available for sale at each of a series of possible prices during a specific period.
supply schedule
This shows the quantities of a good that will be supplied at various prices.
law of supply
As price rises, the quantity supplied rises and vice versa is also true.
supply curve
Curve that corresponds with the price-quantity supplied data in the accompanying table.
determinants of supply
Are factors that can and do effect supply. AKA supply shifters. Ex. resource prices, technology, taxes and subsidies, prices of other goods, producer expectations, and # of sellers in market.
change in supply
A change in the supply schedule and a shift in the supply curve.
(increase shifts to right and decrease to left).
change in quantity supplied
Is the movement from one point to another on a fixed supply curve.
equilibirium price
Is the price where the intentions of buyers and sellers match.
equilibrium qunatity
Is the quantity demand and quantity supplied at the equilibrium price.
surplus
Extra product from there being to much quantity and not enough demand. Above equilibrium.
shortage
Not enough product from there being to much demand and not enough quantity. Below equilibrium.
productivity efficiency
Is the production of any particular good in the least costly way.
allocative efficiency
Is the particular mix of goods and services most highly valued society.
price ceiling
Sets a maximum legal price a seller may charge for a product or service. Helps consumers obtain essential products that are unaffordable at the equilibrium price.
price floor
Sets a minimum legal price a seller may charge for a product or service. Help consumers that are struggling for income because their products' equilibrium price is too low to make enough money.
economic system
A particular set of institutional arrangements and a coordinating mechanism to respond to the economizing problem.
command system
Government owns most property resources and economic decision making occurs through a central economic plan.
market system
Characterized by the private ownership of resources and the use of markets and prices to coordinate and direct economic activity.
private property
Is the right of persons and firms to obtain, own, control, employ, dispose of, and bequeath land, capital, and other forms of property.
freedom of enterprise
Ensures that entrepreneurs and private businesses are free to obtain and use economic resources to produce their choice of goods and services and to sell them in their chosen markets.
freedom of choice
Enables owners to employ or dispose of their property and money as they see fit.
self-interest
Idea that each economic subunit tries to achieve its own particular goal, which usually requires delivering something of value to others.
competition
Ensures that no single buyer or seller dictates the price of a product or resource because others can undercut that price.
market
Is an institution or mechanism that brings buyers and sellers into contact.
specialization
Is the use of resources of an individual, firm, region, or nation to produce one or a few goods or services rather than the entire range of goods services.
division of labor
Is human specialization.
medium of exchange
Is the function of money. It makes trade easier.
barter
swapping exchange of goods for goods.
money
Is a convenient social invention to facilitate exchange of goods and services.
consumer sovereignty
Is the description of a market system because consumers run the system.
dollar votes
Idea that whenever a person buys something they cast their wants in the market.
creative destruction
Is the creation of new products and production methods completely destroys the market positions of firms that are wedded to existing products and older ways of doing business. Ex. tapes->CDs
"invisible hand"
Is the idea that firms and resource suppliers, seeking to further their own self-interest and operating within the framework of a highly competitive market system, will simultaneously promote the public or social interest.
circular flow diagram
Illistrates the flows of goods and services, resources, and money.
resource market
The place where resources or the services of resource suppliers are bought and sold.
product market
The place where goods and services produced by businesses are bought and sold.
economics
The social science concerned with how individuals, institutions, and society make optimal choices under conditions of scarcity.
economic perspective
Economic way of thinking; The perspective that economists use to view things;
opportunity cost
Is a type of sacrifice; To obtain more of one thing, society forgoes the opportunity of getting the next best thing.
utility
Is the pleasure, happiness, or satisfaction obtained from consuming a good or service; Measure of relative satisfaction.
marginal analysis
Is the comparisons of costs versus benefits; EX. benefit=larger size of ring (utility or pleasure); cost=added expense beyond the cost of the smaller size. Weigh cost and benefits till the marginal costs outweigh the benefits.
scientific method
1) Observing real-world behavior and outcomes.
2)Based on observations, a possible explanation of cause and effect (hypothesis) can be formulated.
3) Test by comparing real-world outcomes with the hypothesis's predictions.
4) Accepting, rejecting, and changing the hypothesis based on the comparisons.
5) Continued testing. As favorable results accumulate, the hypothesis turns into a theory. A widely tested and accepted theory will then turn into an economic law or principle.
economic principle
A statement about economic behavior or the economy that enables prediction of the probable effects of certain actions.; A very well tested theory.; ""'s are expressed as the tenancies of typical or average consumers, workers, or business firms.
other-things-equal assumption
An assumption in which factors, other than those being considered, do not change.; Assumes all variables except the ones under consideration are held constant.
microeconomics
Part of economics concerned with individual units such as a person, household, firm, or an industry (small segment of the economy).
macroeconomics
Is the part of economics that examines either the economy as a whole or its basic subdivisions or aggregates, such as the government, household, and business sectors.
aggregate
Is a collection of specific economic units that is treated as if they were one unit.
positive economics
This focuses on facts and cause-and-effect relationships. (scientific facts).
normative economics
This incorporates value judgments about what the economy should be like or what particular policy actions should be recommended to achieve a desirable goal.; looks at the desirability of certain aspects of the economy.
budget line
The visual clarification of the economizing problem facing consumers (Graphs pg. 9).
economizing problem
The need to make choices because economic wants exceed economic means.
economic resources
All natural, human, and manufactured resources that go into the production of goods and services.
land
This includes all natural resources (gifts of nature) used in the production process, such as arable land, forests, mineral and oil deposits, and water resources.
labor
This consists of the physical and mental talents of individuals used in producing goods and services.
capital
This includes all manufactured aids used in producing consumer goods and services.
investment
Is the purchase of capital goods.
entrepreneurial ability
Entrepreneur abilities: 1) Entrepreneurs takes the initiative in combining the resources of land, labor, and capital to produce a good or service. 2) " makes the strategic business decisions that set the course of an enterprise. 3) " is an innovator. 4) " is a risk bearer.
factors of production
They are land, labor, capital, and entrepreneurial ability. These are also called "inputs".
consumer goods
Are products that satisfy our wants directly
capital goods
Products that satisfy our wants indirectly.
production possibilities curve
Displays the different combinations of goods and services that society can produce in a fully employed economy.
law of increasing opportunity costs
As the production of a particular good increases, the opportunity cost of producing an additional unit rises.
economic growth
Is when an increase in the quantity and quality of resources occurs, the production possibilities curve shifts outward and to the right.; A larger total output.
Importance of scarce resources and unlimited wants?
Because we have scarce resources and an unlimited wants, everyday we have to decide what we will have and what we will forgo choosing what we will have in the most optimal way possible.
Why no free goods?
All resources are either privately or collectively owned; so goods may seem free but someone bears a cost (society maybe?).
What is purposeful behavior?
People make decisions with some desired outcome in mind; They weigh costs and benefits, so their behavior is rational in order to maximize their satisfaction.
Positive versus normative economics?
Positive economics concerns "what is", whereas normative economics embodies subjective feelings about "what ought to be". Ex) positive: The unemployment in France "is" higher than in the US. normative: The unemployment "ought to/should be" higher than the US.
Capital goods versus consumer goods?
Capital goods differ from consumer goods because consumer goods satisfy wants directly whereas capital goods do so indirectly by aiding in the production of consumer goods.