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Terms in this set (148)
The branch of economics which studies the working of the economy as a whole. It involves aggregates that cont, inflation, distribution of wealth and income and external stability.
Circular Flow of income
The flow of income between households (consumers) and firms. Expenditures on goods and services flow from households to firms, and income flows from firms to households. Leakages may flow out of the economy, but flow back in by injections.
National Income Accounting
measuring an economy's national income or the value of its output.
The (1) total market value of all (2) final goods and services produced in a country over a (3) given period of time, usually one year, before depreciation.
Net Domestic Product (NDP)
GDP adjusted for depreciation.
Gross National Income (GNI)
The sum total of all final goods and services produced by a country in a given period of time, usually one year, plus the value of net factor (property) income from abroad. (formerly known as Gross National Product (GNP))
Net National Income (NNI)
GNI adjusted for depreciation.
National Expenditure Approach
is the total of all spending in an economy over one year by the four components of aggregate demand: C+I+G+X-M
National Output Approach
Is the sum total of all final goods and services added together over a time period of usually one year, calculated by summing up the value-added at each stage of production
• This avoids "double-counting intermediate goods".
- It is important not to count intermediate goods and services, example steel that produces cars
National Income Approach
The income accrued by a country's residents for supplying productive resources, and is the sum of all forms of wages, rent, interest and profits over a given period of time
Depreciation (of fixed capital)
The wearing out of capital goods, also called capital consumption.
cost of all factors of production used in the production process, before the adjustment for taxes and subsidies.
GDP per capita
GDP divided by the population.
GDP/GNI that has been adjusted to take into account environmental destruction (loss of resources) and/or health consequences of environmental problems.
Purchasing Power Parity
(PPP) is a theory which states that exchange rates between currencies are in equilibrium when their purchasing power is the same in each of the two countries.
• When you make two currencies equal to the value of one US dollar and compare prices and GDP.
The Business Cycle
The periodic fluctuations of national output around its long term trend. Often occurs at a generally upward growth path (productive potential).
• Economies tend to move through stages including "boom" and "bust.
is the relationship between the aggregate quantity of goods and services demanded - or Real GDP - and the price level. (C+ I+G+X-M)
is the business purchase of goods and services or additions to capital stock (new buildings, new plant, new vehicles, new machinery), and additions to inventory.
means the average of all prices, measured using an index. We use price levels to give us the 'real' total output or expenditure.
The total supply of goods and services produced within an economy at a given overall price level in a given time period. • describes the relationship between price levels and the quantity of output that firms are willing to provide.
when prices of final goods and services change ( ∆ average price level), but factor prices do not - there is a time lag.
when factor prices do adjust to final price changes ( ∆ average price level).
Natural rate of employment
The level of unemployment which still exists when the labor market clears. So there is no cyclical unemployment, only structural and frictional and seasonal.
• Increase in demand at this level will cause inflation.
Full Employment (Level of National Income)
This is the level at National Income at which everyone who wants to work is able to. There is in other words, sufficient demand to employ everyone who wants to be working and possesses the skills.
Long--Run Aggregate Supply
is the relationship between real output and the price level at full employment. It is defined as that period in time when all markets are in equilibrium, including the labor market. (The natural rate of unemployment).
Occurs at the price level where aggregate demand equals aggregate supply.
Keynesian Model (John Meynard Keynes)
Economic viewpoint: The economy is inherently unstable and can remain in a recessionary or inflationary period indefinitely. The government needs to intervene to correct this imbalance. How:
• During a recession/deflationary period the government needs to induce spending or "prime the pump" (aggregate demand). During an inflationary period the government needs to use measures to decrease spending (aggregate demand).
Neo-Classical Model (New Classical Model)
Economic Viewpoint: The economy is inherently stable, and although there may be periods where the economy slows down, it will self-correct. The government should intervene as little as possible. • Markets operate more efficiently when the government stays out of the economy.
• Flexible prices, wages, and interest rates
Recessionary Gap (also called Deflationary Gap)
Where an economy is operating below its full employment equilibrium. There are unemployed resources! • Under this condition, the level of real GDP is currently lower than its full employment, which puts downward pressure on prices in the long-run.
is a business cycle contraction, a general slowdown in economic activity; by definition, two or more quarters of negative growth in Gross Domestic Product.
is slow growth, lower than the long-term average growth trend and not enough to accommodate full-employment.
A macroeconomic condition that describes the distance between the current level of real GDP and the full employment (long run equilibrium) real GDP. Real GDP is higher than full-employment GDP and there is upward pressure on prices.
A situation in which everyone in the labor force that is willing to work at the market rate for his type of labor has a job.
A situation where a country (or enterprise) has excess labor that remains employed. Also, where people are employed but working less hours than they would like
Those of working age who are without work, but who are available for work at the current wage rates. (actively seeking employment)
is the number of unemployed expressed as a percentage of the labor force
Demand deficient or cyclical unemployment
unemployment caused by the business cycle where the slowdown in economic activity with falling aggregate demand is the cause of unemployment.
unemployment as a result of people who are between jobs, or are entering, or reentering the job market ( labor force).
• It often takes time for workers to find jobs, even though there are jobs. It is often seen as a healthy for an economy to have workers move into areas of need.
unemployment caused by a change in the demand for skills as the nature or structure of the economy changes (dynamic economy).
• So there is a mismatch between qualifications, skill-sets and characteristics of the unemployed and available jobs. Example
Car workers, steel workers in the US.
unemployment associated with industries or regions where the demand for labor is lower at certain times of the year.
disequilibrium unemployment being driven up above the market clearing rate. It is caused my non-market forces entering the labor market such, as Government imposed minimum wage, or labor unions pushing up wages.
Natural rate of Unemployment
Unemployment resulting from a situation where there is no cyclical unemployment, only structural, frictional and seasonal. It is seen as the rate of full employment where demand for labor equals the supply of labor.
The labor market is not in equilibrium. Example when supply of labor exceeds the demand for labor, or vice versa
Inflation is the sustained (persistent) upward movement in the average level of prices.
Sustained (persistent) is important as if only a one off increase, it is not considered inflation
Rate of Inflation
The percentage increase in the price of goods and services, usually annually. Most commonly associated with the Consumer Price Index
Consumer Price Index
Measures the change in purchasing a fixed basket of goods and services from one time period to another. A price index measuring average prices over time!
When the average level of prices is moving neither up or down.
is the average level of prices.
Demand Pull Inflation
Inflation induced by a persistence of an excess of aggregate demand in the economy over aggregate supply. Can be looked at as too much money chasing too few goods and services.
The Quantity of Money Theory (excess monetary growth)
claims that in the long-run an increase in the quantity of money causes an equal increase in the price level
Cost Push Inflation
the situation in an economy where there is sustained prices rises because of production costs increasing, example wages, imported materials, interest rates and rents.
A sustained reduction in the general level of prices (Japan, Hong Kong)
The Phillips Curve
This study showed a strong inverse relationship between inflation and unemployment.
Long-Run Phillips Curve
In the long run this trade-off between inflation and unemployment does not tend to occur. Unemployment will gravitate toward the natural rate of unemployment.
Economics as a social science
It is concerned with human beings and the social systems by which they organize their activities to satisfy basic material needs (i.e, education, knowledge, food, golf and shelter)
Concerned with the production of goods and services, and the consumption of these goods and services. Every country whether rich or poor has to make choices and is confronted with the key economic problem of scarcity.
The branch of economics which studies the working of the economy as a whole, or large sections such as all households, all business and government. The focus is on aggregate situations such as economic growth, inflation, unemployment, distribution of income and wealth, and external viability.
The branch of economics that studies individual units.
A statement that can be verified by empirical observation
a value judgment about what ought or should happen,
A situation where unlimited wants exist but the resources available to meet them are limited.
Analysis of how scarce resources ('factors of production') are distributed among producers, and how scarce goods and services are apportioned among consumers.
natural resources, i.e trees, ocean, fertile land, minerals, sunshine (rent)
human resources, physical or mental (wages)
capital resources, man-made resources used in the production process i.e. machines in a factory (interest)
organizing the above three in the production of goods or services (profit)
All things being equal - one of the assumptions used in many economic models, where an individual factor is changed while all others are held constant.
The result of the economic problem of scarcity, and how you allocate resources to deal with the economic problem.
Benefits or satisfaction gained from consuming goods and services - hard to measure but we assume consumers make decisions based on maximizing utility.
Cost measured in terms of the next best alternative forgone.
Things people want that are scarce - there is an opportunity cost involved.
Commodities that have no price and no opportunity cost,
Production Possibility Curve
A curve showing all the possible combinations of two goods that a country can produce within a specified time with all its resources fully and efficiently used. The boundary between what is attainable and what is unattainable, given the current resources.
The law of increasing opportunity costs
Countries,/businesses must give an increasing amount to receive a decreasing amount as they shift from one industry to another. Resources are NOT perfectly adaptable from one in industry to the next.
That part of the economy where goods and services are provided by the government,
That part of the economy that is characterized by private ownership of the means of production by profit seeking individuals.
An economy where all economic decisions are made by a central authority. Usually associated with a socialist or communist economic system
Free Market Economy
an economy where all economic decisions are taken by individual households and firms, with no government intervention.
an economy where economic decisions are made partly by the government and partly through the market. (nearly every economy in the world)
Development that meets the needs of the present without compromising the ability of future generations to meet their own needs.
the increase in a country's output over time; that is an increase in national income.
a much broader concept that purely economic growth, involving non-economic and often quite intangible improvements in the standard of living, for example freedom of speech, freedom from oppression, health care, education and employment
An organization or arrangement through which goods and services are exchanged - do not have to physically meet
Is the process by which prices rise or fall as a result of changes in demand and supply. PRICE acts as a Signal and incentive to producers and consumers to produce more or less or consume more or less.
is the quantity which buyers are willing to purchase of a particular good or service at a given price over a given period of time, all things being equal.
Law of demand
consumers will demand more of a good at a lower price and less at a higher price, ceteris paribus - this is an inverse relationship
Goods where demand increases as income increases
Goods where demand falls as income increase
Two good that consumed together. A change in the price of one will have an inverse effect on demand and price of the other.
Goods that can be used for the same purpose and are in competitio0n with one another, and are therefore alternatives for each other. Substitutes will have positive cross elasticity of demand
The quantity which sellers are willing to sell of a particular good or service at a given price at a given point in time.
Law of supply
Suppliers will supply more of a good at a higher price and less at a lower price all things being equal - a positive relationship.
The price at which the quantity buyers demand of a product equals the quantity suppliers are willing to supply so the market is cleared
Refers to the efficiency with which markets are allocating resources. A market will be efficient when it is producing the right goods for the right people at the right time.
Is when consumers are able to by a good for less than they were willing to pay. It is the area between the demand curve and equilibrium price.
Is the difference between the minimum price a producer would accept to supply a given quantity of a good and the price actually received. It is the gap between the Supply Curve (the marginal cost curve) and the equilibrium price.
the measure of responsiveness in one variable when another changes.
Price Elasticity of Demand (PED)
The responsiveness of the quantity demanded to a change in price.
PED = % ∆ QD/ % ∆ Price
Price Elasticity of Supply (PES)
The responsiveness of a quantity supplied to a change in price.
PES = % ∆Qs / % ∆ Price
Cross Price Elasticity Definition( XED or CPED)
the responsiveness of a demand for one good to a change in the price of another good.
CPEDab = % ∆ Qd a/% ∆ Price b
Income Elasticity of Demand Definition (YED)
the responsiveness of demand for a good to a change in consumer incomes.
YED = %_∆ Qd /% ∆ Y
Means that one variable is unresponsive to changes in another. Change in price will have no effect on change in quantity demanded or quantity supplied.
Means that one variable is unresponsive to changes in another. Any change in price results in supply or demand falling to zero.
goods that are available from cultivating raw materials without a manufacturing process.
effectively a negative tax - financial assistance made by governments to enterprises/business/firms/producers which will lower the price and increase production.
is a tax upon income - it directly taxes wages, rent, interest and profit
is an expenditure and sales tax upon goods and services - collected by sellers and passed onto governments.
Flat rate or specific tax
when a specific amount is imposed on a good.
i.e. $3 on every bottle of alcohol
Ad Valorem tax
is a tax expressed as a percentage - most common form of indirect tax - when the price of a good changes the tax going to the government automatically changes as well. It changes the slope of the new supply curve.
Incidence or burden of a tax
who actually pays the tax, what percentage is paid by the sellers/producers and what percentage is paid by the buyers/consumers
The amount of government revenue/income that will be achieved/collected through a tax.
Resource allocation with tax
The way that resources within an economy are split between their various uses - the way in which resources are used. How will resource allocation change with the imposition of the tax.
Price Ceiling or Maximum pricing
Prices are imposed by government below the equilibrium price and are designed to help consumers by making prices cheaper than they would otherwise be, and tends to create a market shortage.
Price floor or Minimum pricing
lower limit/floor set by government the price charged to consumer may not fall. A minimum price is usually set above the equilibrium as an aid to producers, and tends to create a market surplus.
Parallel Market (black or informal)
Is unrecorded activity where no tax is paid and regulations can be avoided .
When a market fails to produce efficient outcomes, and in particular, the failure of the price mechanism to achieve an optimum allocation of resources.
Refers to the efficiency with which markets are allocating resources. A market will be efficient when it is producing the right goods for the right people at the right time.
is an effect of production or consumption that is not taken into account by producers or consumers that affects the utility or costs of other producers or consumers (third party).
Positive externalities (also called social benefits)
Benefits of economic activity that are not accounted for in production costs or price.
Negative externalities (also called social costs)
Costs of economic activity that are not accounted for in production costs or price.
A good is rivalrous if the use of it by one person prevents the use of another.
People are excluded from using the good unless they pay a price for it.
Goods and services that everyone can consume at the same time, and are non-rivalrous and non-excludable (see below) and therefore would not be normally provided by the private market.
Publicly provided goods
Goods and services that would be provided by the market but because of their positive externalities are wholly or partly provided by the government, .
Goods and services that are excludable and rivalrous and are therefore provided by the market.
Common Good or Resource
a good that can be attained by any person. It is non- excludable, but rivalrous.
A good with positive externalities that benefits society.
A good with negative externalities that has costs for society.
Those who benefit from a good or service without paying a share or its cost - this is why the market will not provide public goods.
Internalize the externality
Making the user or producer pay or be responsible for the externality.
Tradable Permits (carbon credits)
Tradable emissions permits are used in an environmental regulatory scheme where the sources of the pollutant to be regulated (most often an air pollutant) are given permits to release a specified number of tons of the pollutant. The government issues only a limited number of permits consistent with the desired level of emissions. The owners of the permits may keep them and release the pollutants, or reduce their emissions and sell the permits. The fact that the permits have value as an item to be sold gives the owner an incentive to reduce their emissions
When one party to a transaction has access to relevant information that the other party doesn't.
When employing an agent, the principal may not be sure if they are working in their (principal's) best interest or their own (agents) best interest. The principal faces information asymmetry and risk with regards to whether the agent has effectively completed a contract.
The process by which prices rise or fall as a result of changes in demand and supply. Signals and incentives are given to producers and consumers to produce more or less or consume more or less.
A tax per unit of carbon emissions or fossil fuels as a policy to deal with the problem of climate change.
Cap and Trade scheme or tradable permits
A scheme in which a country , of a group of countries, set a limit (or cap) on the amount of pollutants that can be legally emitted by a firm, and the firms are allotted permits. Firms that become for efficient and pollute less can sell their permits in the market, firms that do not must buy permits in the market or they will receive heavy fines.
Allocatively efficient output
This occurs where marginal social cost equals marginal social benefit (MSC = MSB) - this is called the socially optimum level or output.
Well-being of society
externalities caused by the production or consumption of a good that affects people who are not directly involved in its production or consumption
the total costs to society from the production or consumption of a good. Social cost = private costs + external costs (negative externalities).
social optimum equilibrium
occurs in a market where the benefit society receives from the consumption of the next unit is equal to the cost incurred by society of the next unit (MSB = MSC)
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