Macroeconomics key terms PDF

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Macroeconomics key terms Chapter 1: Economics -> The study of how people, individually and collectively, manage resources. Microeconomics -> The study of how individuals and firms manage resources Macroeconomics -> The study of the economy on a reginal, national, or international scale Rational Behaviour -> Making choices to achieve goals in the most effective way possible Scarcity -> The condition of wanting more then we can get with available resources Opportunity Cost -> The value of what you have to give up in order to get something; the value of your next best alternative Marginal Decision Making -> Comparison of additional benefits of a choice against the additional costs it would bring, without considering related benefits and costs of past choices Sunk Cost -> A cost that has already been incurred and cannot be recovered or refunded Incentive -> Something that causes people to behave in a certain way by changing the trade-offs they face Efficiency -> Use of resources in the most productive way possible to produce the gods and services that have the greatest total economic value to society Correlation -> A consistently observed relationship between two events or variables Causation -> A relationship between two events in which one brings about another Model -> A simplified representation of the important parts of a complicated situation Circular Flow model-> A simplified representation of how the economy’s transactions work together Positive statement -> A factual declaration about how the world actually works Normative Statement -> A claim about how the world should be Textbook Notes - Economists break down problems by asking a set of four questions 1. What are the wants and constraints of those involved? 2. What are the trade-offs? 3. How will others respond? 4. Why isn’t everyone already doing it? o Innovation o Market failure o intervention o Goals other than profit - Correlation and causation o Confused in 3 major ways  Correlation without causation  Omitted variables  Reverse causation

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Basic model of the economy is the circular flow model

What makes a good model? o Predicts cause of effects o Makes clear assumptions o Describes the real world accurately Chapter 7: Gross Domestic Product (GDP) -> The sum of the market values of all final goods and services produced within a country in a given period of time Gross National Product (GNP) -> The sum of the market values of all final goods and services produced plus capital owned by the residents of a country in a given period of time Consumption -> spending on goods and services by private individuals and households Investment -> spending on productive inputs, such as factories, machinery and inventories Inventory -> The stock of goods that a company produces now by does not sell immediately Government Purchases -> spending on goods and services by all levels of government Net Exports -> Exports minus imports; the value of goods and services produced domestically and consumed abroad minus the value of goods and services produced abroad and consumed domestically Real GDP -> GDP calculation in which goods and services are valued at constant prices Nominal GDP -> GDP calculation in which goods and services are valued at current prices GDP deflator -> A measure of the overall increase in prices in an economy, using the ratio between real and nominal GDP GDP per capita -> A country’s GDP divided by its population Recession -> A period of significant economic decline Depression -> A particularly severe or extended recession Green GDP -> An alternative measure of GDP that subtracts the environmental costs of production from the positive outputs normally counted in GDP Textbook notes: - Rapid economic growth can create jobs, reduce poverty and improve its standards of living -

Most commonly used metric for measuring the value of a national economy is gross domestic product (GDP) Unpacking the definition of GDP - Definition of GDP has 4 important pieces: 1. Market value o Translating products (jam, honey, maple syrup) into a common unit so we can add them all up  The common unit is their market value—in Canada, measured in dollars 2. Of final goods and services o Want to avoid double-counting, we should ignore the price of intermediate goods and services (goods and services used to produce something else) o So, we only count expenditures on final goods and services (ones that get sold to the consumers) o Example: A jar of jam that bought at a store for $3.40 is the only thing that gets added to the GDP 3. Produced within a country o Goods and services that count toward GDP are defined in terms of the location of production not the citizenship of the producer o Example: Canadian company owns a factor in Mexico, goods produced in that factor would count toward Mexican GDP not Canadian 4. In a given period of time o GDP is usually calculated on a quarterly basis (4 times a year) o Typically, we want an annual GDP , so we take the quarterly GDP and multiply it by 4. But the economy isn’t the same all year long. In December people usually travel and buy presents, so the GDP is adjusted when trying to predict a year’s worth by accounting for seasonal patterns. o Quarterly is usually shown as estimate because seasonally adjusted an annual rate. o By taking into account of predictable seasonal patterns we can make a good guess at what an annual GDP would be - Gross National Product (GNP) is calculated by measuring the value of what is produced by each country’s companies regardless of their location. Production Equals Expenditure Equals Income - Size of an economy means= the amount of ‘stuff’ people in the economy are making o ‘stuff’ is either output or production which includes goods and services - The market price of a good what it is being bought or sold o Market value of output sold in a country = all money people spend buying final goods or services (careful to omit spending on intermediate goods so they aren’t double counted  AKA we can measure total output my measuring total expenditure - Expenditures from one person translate into income for another - Production can be measured by adding up everyone’s income - National production=national expenditure=national income Approaches to Measuring GDP - The Expenditure Approach o Measure output using the expenditure method -

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o Does not include intermediate goods so no double counting o Broke into 4 categories  Most final goods and services are bought by people who intend to consume them, such as a family buying groceries or clothes or haircuts  Firms buy some goods as an investment in future production, such as a farmer buying a new tractor to use in growing berries or a jam factory buying new machinery. The reason that we use these is because the tractor and the machinery is not used in the producing the jar of jam like the fresh berries are  We also want to count government purchases, which include everything from fighter planes to asphalt for road repair to those plastic bins that go through the scanner at the airport security checkpoints  If were interested in the output of the Canadian economy , then clearly, we want to count goods and services produced in Canada and bought by foreigners, which are called exports. But we don’t want to count expenditures by Canadians on items produced outside of Canada, which are called imports. For that reason, we subtract the amount of imports from the amount of exports and use the result—net exports—to calculate expenditures o Consumption (C)  Measures spending on goods and services by private individuals o Investment (I)  Includes spending productive inputs  i.e. factories, machinery and inventories o Government purchases (G)  Represents goods and services bought by all levels of government  i.e. consumption- type purchases  investment- type purchases o Net Exports (NX)  Value of goods and services produced domestically and consumed abroad minus the value of goods and services produced abroad and consumed domestically.  If exports higher then imports, NX will be positive  If imports higher then exports, NX will be negative o If all four are added together then they will equal expenditures on all goods and services produced in a country, otherwise equals the value of that production  Expenditure = C+I+G+NX= production The Income Approach o Gives same result as expenditure method in an economy o All income earned by everyone added up  Wages earned by workers, interest earned on capital investments, rents earned on land and property, and profits earned by firms.  Income = wages + interest + rental income + profits The Value-Added Approach o Third approach economist use to measure economic output o Counts only the value that is added to an economy

Using GDP to compare Economies - Increase in GDP is often a result of growth in 2 components – increase in output and increase in prices Real Versus Nominal GDP - GDP enables us to track the value of output over a period of time - Real GDP is calculated based on goods and services valued at constant prices over a specific year o Quantity - Nominal GDP is calculated based on goods and services valued at current prices o i.e. Nominal GDP measured in 2017 would be valued in 2017 prices Chapter 8: Market Basket -> A list of specific goods and services in fixed quantities Price Index -> a measure showing how much the cost of a market basket has risen or fallen relative to the cost in a base period or location Consumer Price Index (CPI) -> A measure that tracks changes in the cost of a basket of goods and services purchased by a typical Canadian household as calculated by statistics Canada Inflation Rate -> The size of the change in the overall price level Indexing -> The practice of automatically increasing payments as the cost of living increases Purchasing Power Parity -> The theory that price levels in different countries should be the same when stated in a common currency PPP-adjustment -> recalculating economic statistics to account for differences in price levels across countries Textbook Notes - Transaction costs o reasons why PPP doesn’t hold their prices o costs money to move goods from one place to another - Non-tradable o Some goods and services can’t be taken from place to place - Trade restrictions o International is not free o Restrictions discourage people from fully taking advantage of lower prices in other countries o Chapter 9: Productivity -> output produced per worker Physical Capital -> The stock of equipment and structures that allow for production of goods and services Human Capital -> The set of skills, knowledge, experiences, and talent that determines the productivity of workers Convergence Theory -> The theory that countries that start out poor will initially grow faster than rich ones, but will eventually converge to the same growth rate Investing trade-off -> a substitution of current consumption or investment in physical capital for future production

Domestic savings -> savings for capital investment that come from within a country; equals domestic income minus consumption spending Foreign Direct Investment (FDI) -> Investment when a firm runs part of its operation abroad or invests in another company abroad Chapter 10: Unemployment -> Situation in which someone wants to work but cannot find a job Labour Force -> People who are in the working-age population and are either employed or unemployed—i.e., people who are currently working or who are actively trying to find a job Unemployment Rate -> The number of unemployed people divided by the number of people in the labour force Labour-Force participation Rate -> The number of people in the labour force divided by the working-age population Discouraged Workers -> Workers who have looked for work in the last year but have given up looking because of the condition of the labour market Underemployed -> Workers who are either working less than they would like to or are working in jobs below their skill levels. Labour demand Curve -> A graph showing the relationship between the wage rate and the total labour demanded from all the firms in the economy Labour Supply Curve -> A graph showing the relationship between he total labour supplied in the economy and the wage rate Natural Rate of Unemployment -> the minimum level of unemployment that is unavoidable in a dynamic economy. Frictional Unemployment -> unemployment caused by workers who are changing location, job or career Structural Unemployment -> unemployment due to a mismatch between the skills workers can offer and the skill in demand Real-wage or classical unemployment -> unemployment that results from wages being higher than the market-clearing level Cyclical unemployment -> unemployment resulting from changes in GDP Labour unions -> groups of employees who join together to bargain with their employer(s) over salaries and work conditions Efficiency wage -> A wage that is deliberately set about the market rate to increase worker productivity Employment insurance -> money paid by the government to people who are unemployed Chapter 11: Aggregate Demand Curve -> a curve that shows the relationship between the overall price level in the economy and total demand Aggregate Supply Curve -> a curve that shows the relationship between the overall price level in the economy and total production by firms Business Cycle -> Fluctuations of GDP either above or below the potential level of GDP in the economy

Supply Shock -> Significant event that directly affects production and the aggregatesupply curve in the short run Chapter 12: Fiscal Policy -> government decisions about the level of taxation and government spending Expansionary fiscal policy -> fiscal policy that increases aggregate demand Contractionary fiscal policy -> fiscal policy that decrease aggregate demand Automatic stabilizers -> taxes and government spending that affect fiscal policy without specific action from policy makers Multiplier effect -> the increase in consumer spending that occurs when spending by one person cause others to spend more, too, increasing the impact of the initial spending on the economy Marginal propensity to consume (MPC) -> The amount that consumption increases when after-tax income increases by $1 Government-spending multiplier -> The amount by which GDP increases when government spending increase by $1 Taxation multiplier ->The amount GDP decrease when government taxes increase by $1 Transfer payments -> payments form government accounts to individuals for programs, like social insurance, that do not involve a purchase of goods or services Budget deficit -> the amount of money a government spends beyond the revenue it brings in Budget surplus -> The amount of revenue a government brings in beyond what it spends Public debt -> The total amount of money that a government owes at a point in time Chapter 13: Financial market -> a market in which people trade future claims on funds or goods Market for loanable funds -> a market in which savers supply funds to those who want to borrow Savings -> the portion of income that is not immediately spent on consumption of goods and services Investment -> spending on productive inputs, such as factories, machinery and inventories Real interest rate -> the interest rate adjusted for the effects of inflation Crowding out -> the reduction in private borrowing caused by an increase in government borrowing Default -> the failure of a borrower to pay back a load according to the agreed-upon terms Risk-free rate -> the interest rate at which money would be loaned if there were no risk of default; usually approximated by interest rates on government debt Financial system -> the group of institutions that bring together savers, borrowers, investors and insurers in a set of interconnected markets where people trade financial products Financial intermediaries -> Institutions that channel funds from people who have t hem to people who want them Liquidity -> a measure of how easily a particular asset can be converted quickly to cash without much loss of value

Diversification -> the process by which risks are shared across many different assets or people, reducing the impact of any particular risk on any one individual Stock -> A financial asset that represents partial ownership of a company Dividend -> a payment made periodically, typically quarterly or annually, to all shareholders of a company Loan -> an agreement in which a lender gives money to a borrower in exchange for a promise to repay the amount loaned plus an agreed-upon amount of interest Bond -> A form of debt that represents a promise by the bond issuer to repay the face value of the loan, at a specified maturity date, and to pay periodic interest at a specific percentage rate Derivative -> an asset whose value is based on the value of another asset Mutual fund -> A portfolio of stocks and other assets, managed by a professional who makes decisions on behalf of clients Pension Fund -> A professionally managed portfolio of assets intended to provide an income to retirees Market (systemic) risk -> Any risk that is broadly shared by the entire market or economy Idiosyncratic risk -> Any risk that is unique to a particular company or asset Standard deviation -> A measure of how spread out a set of numbers is Net Present Value (NPV) -> A measure of the current value of a stream of cash flows expected in the future Efficient- Market Hypothesis -> The idea that market prices always incorporate all available information, and therefore represent true value as correctly as is possible Arbitrage -> The process of taking advantage of market inefficiencies to earn profits Private savings -> The savings of individuals or corporations within a country Public Savings -> The difference between government tax revenue and government spending National Savings -> The sum of the private savings of individuals and corporations plus the public savings of the government Closed economy -> An economy that does not interact with other countries economics Open economy -> An economy that interacts with other countries economics Net capital outflow -> The net flow of funds invested outside of a country Chapter 15: Inflation -> An overall rise in prices in the economy Deflation -> An overall fall in prices in the economy Core Inflation -> Measure of inflation that excludes goods with historically volatile price changes Aggregate Price Level -> A measure of the average price level; in practice the CPI or GDP price deflator Neutrality of Money -> The idea that aggregate price levels do not affect real variables in the economy Quantity theory of Money -> Theory that the value of money is determined by the overall quantity of money in existence (the money supply) Velocity of Money -> The number of times the entire money supply turns over in a given period

Menu Costs -> The costs (measured in money, time and opportunity) of changing prices to keep pace with inflation Shoe-Leather Cost -> The costs ( measured in time, money and effort) of managing cash in the face of inflation Nominal Interest Rate -> the reported interest rate, not adjusted for the effects of inflation Real interest Rate -> the interest rate adjusted for the effects of inflation Disinflation -> a period in which inflation rates are falling, but still positive Potential Output -> the total amount of output a country could produce if all of its resources were fully engaged. Output gap -> the difference between actual and potential output in an economy Phillips Curve -> a model that shows the connection between inflation and unemployment in the short run Non-accelerating Inflation Rate of unemployment (NAIRU) -> The lowest possible unemployment rate that will not cause the inflation rate level to increase Chapter 17: Balance of Trade -> the value of exports minus the value of imports Trade Deficit -> A negative balance of trade; greater amount of imports than exports Trade Surplus -> a positive balance of trade; a greater amount of exports than imports Foreign Direct Investment (FDI) -> Investment when a firm runs part of its operation abroad or invests in another company abroad Foreign Portfolio Investment -> investment funded by foreign sources but operated domestically Net Capital Outflow -> the net flow ...