Term
| Big Idea 1. Incentives Matter |
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Definition
| Incentives are rewards and penalties that motivate behavior |
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Term
| Big Idea 2. Good Institutions align self-interest with the social interest |
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Definition
| Think about the Invisible hand |
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Term
| Big Idea 3. Trade-offs are everywhere |
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Definition
• Recognizing trade-offs is the first step in making wise decisions
• The Opportunity Cost is the best alternative sacrificed for a chosen alternative. |
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Term
| Big Idea 4. Thinking on the Margin |
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Definition
| • Marginal Analysis is an examination of the effects of additions to or subtractions from a current situation. |
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Term
Big Idea 5. Tampering with the Laws of Supply
and Demand Has Consequences |
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Definition
| Interference by government decree in the mechanisms of this model rarely works. |
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Term
Big Idea 6. The Importance of Wealth and
Economic Growth |
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Definition
• Wealth brings higher standards of living.
• Understanding economic growth (how economies increase wealth) is one of the most important tasks of economics. |
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Term
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Definition
| • Such institutions include property rights, political stability, honest government, a dependable legal system, and competitive and open markets. |
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Term
| Big Idea 8. Economic Booms and Busts Cannot be avoided but can be moderated |
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Definition
| Business Cycles are normal |
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Term
Big Idea 9. Prices Rise When the Government
Prints Too Much Money |
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Definition
• Prices rise when the government prints too much money
• Monetary policy can be used to mitigate economic fluctuations, but it can create unwanted side effects.
• Inflation is an increase in the general level of prices.
• Inflation comes about when there is a sustained increase in the supply of money. |
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Term
Big Idea 10. Central Banking Is a Hard Job
Central banking is a hard job |
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Definition
Central Banking Is a Hard Job
Central banking is a hard job |
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Term
| Three Basic Goals of MacroEconomics |
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Definition
1. Rapid Economic Growth
2. High Employment
3. Stable Prices (Or low inflation rates) |
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Term
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Definition
| Combining different indices and measures into a single category to get a macro perspective |
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Term
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Definition
| Peak-Trough-Peak or vice-versa |
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Term
| Definitions of a recession |
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Definition
The Official definition of a recession is a significant, widespread decline in economic activity spread across the economy, lasting for more than a few months, normally visible [as a decline] in real GDP, real income, employment, industrial production, and wholesale-retail sales.
However, in the news: In the news a recession is generally considered to be a period when real GDP falls for 6 or more consecutive months. (This is only a “rule of thumb”) |
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Term
| Counter-Cyclical Variable |
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Definition
| variable that falls when real GDP rises. An example is unemployment. |
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Term
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Definition
| a variable that rises when real GDP rises. Examples are investment spending and employment. |
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Term
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Definition
is the total market value of final goods and services produced within an economy in a given year.
• Calculation: Sum of all final goods and services produced in a given year multiplied by their respective prices |
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Term
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Definition
| are sold to firms and then bundled or processed with other goods or services for sale at a later stage. |
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Term
| GDP National spending (or expenditure) Approach: |
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Definition
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Term
| GDP Factor income (or Payment) approach: |
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Definition
| Y = Wages + Rent + Interest + Profit |
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Term
| Personal Consumption factor of GDP |
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Definition
Durable goods: goods that lasts for long period of time. However, it does not include new homes
Non-durable goods: goods that lasts for short periods of time
Services |
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Term
| Gross Private Domestic Investment factor of GDP |
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Definition
Purchases by business of
• On new plants and equipment
• Newly produced housing (Spending by consumers on new houses)
• Inventory investment
Note: Depreciation is the wear and tear of capital as it is used in production
Gross investment = net investment +
Depreciation |
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Term
| The government factor of GDP |
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Definition
• Government Consumption Expenditures
• Government Gross Investment
Government purchases do not include transfer payments |
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Term
| Net Exports factor of GDP |
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Definition
Exports (X) – Imports (M)
Net exports > 0 is a trade surplus
Net exports < 0 is a trade deficit |
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Term
| The factor Income Approach to GDP |
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Definition
GDP = wages and salaries + interest +
rent + profit |
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Term
| Value Added approach to GDP |
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Definition
| is the revenue a firm receives minus the cost of the intermediate goods and services it buys. |
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Term
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Definition
Nominal variables are measured with out adjustment for the change in the value of currency over time.
Real variables are measured with an adjustment for the change in the value of currency over time. |
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Term
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Definition
| is a price index calculated by dividing nominal GDP by real GDP, and multiplying by 100. This produces an index that measures how the prices of goods included in GDP change over time. |
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Term
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Definition
(NGDP2007 / RGDP2007) * 100
From the above we see that
RGDP = (NGDP/GDPdef) * 100 |
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Term
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Definition
is the market value of all final goods and services produced by a nation’s residents, no matter where they are located.
• GNP = GDP + net income earned abroad |
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Term
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Definition
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Term
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Definition
| NNP - indirect business taxes |
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Term
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Definition
| National income + Transfer payments + personal interest income ─ Corporate Retained profits – Social Security taxes |
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Term
| Problems with GDP as a measure |
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Definition
• It ignores non-market transactions.
• GDP ignores leisure time.
• It ignores the underground economy.
• It ignores changes in the environment. or other negative effects of production
• GDP is not adjusted for changes in crime and other social problems.
• GDP does not measure distribution of income. |
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Term
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Definition
| Periods to double = 70 ÷ percentage of growth rate |
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Term
| Finding the Growth rate in the growth formula |
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Definition
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Term
| The Factors of Production |
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Definition
• Physical capital: the stock of tools, structures, and equipment.
• Human capital: is the productive knowledge and skills that workers acquire through education, training and experience.
• Technological knowledge: knowledge about how the world works that is used to produce goods and services. |
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Term
| The institutions that lead to economic growth |
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Definition
1. Property rights
2. Political stability
3. Honest government
4. A dependable legal system
5. Competitive and open markets |
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Term
| The Solow model of Economic Growth |
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Definition
The model can be written as an aggregate production function Y = F(A, K, eL).
This says that RGDP, Y, depends on the following.
• K: Physical capital
• eL: Human capital times Labor
• A: Ideas |
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