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economics
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social science that studies that choices that individuals, businesses, governments, and societies make as they cope with scarcity and the incentives
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scarcity
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the inability to satisfy all wants at the same time
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choices
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decisions depending on the incentives we face
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incentive
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reward that encourages an action or a penalty that discourages an action
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microeconomics
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the study of the choices that individuals and businesses make and the way these choices interact and are influenced by governments
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marcoeconomics
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the study of the economy as a whole which includes topics like inflation, unemployment and economic growth.
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why study economics?
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-to understand the world better
-to achieve social change
-to help prepare for other careers
-to achieve social change
-to help prepare for other careers
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what is GDP used for?
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measure the economic performance of a country
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GDP (gross domestic product)
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the market value of all final goods and services produced within a country in a given period of time
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market value
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the amount for which something can be sold on a given market.
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final good
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item bought by its final user during a specified time period
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intermediate good
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item that is produced by one firm, bought by another firm, and used as a component of a final good or service
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consumption expenditure
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total payment for consumer goods and services
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investment
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spending on capital equipment, inventories, and structures, including household purchases of new housing
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government expenditure
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governments buy goods and services from firms
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financial transfers
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payments government makes to households, such as unemployment, benefits, and subsidies to firms
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exports
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goods sold to other countries
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imports
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goods brought into a country
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GDP equation
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Y=C+I+G+X-M
(where GDP is Y, consumption (C), investment (I), gov't spending (G), exports (X), imports (M))
(where GDP is Y, consumption (C), investment (I), gov't spending (G), exports (X), imports (M))
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expenditure approach
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GDP = C + I + G + (X-M)
aggregate income equals the total amount paid for the use of factors of production: wages, interest, rent, and profit
aggregate income equals the total amount paid for the use of factors of production: wages, interest, rent, and profit
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depreciation
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the decrease in the value of a firm's capital that results from wear and tear and obsolescence
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gross invesment
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total amount spent on purchases of new capital
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net investment
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increase in the value of the firm's capital
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income approach
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adding the incomes that firms pay households for the factors of production they hire - wages for labor, interest for capital, rent for land, and profit for entrepreneurship
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consumption (C)
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expenditures by households on goods and services
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investment (I)
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expenditures on capital equipment and buildings by forms and the addition to firms inventories
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govt spending (G)
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government expenditures on goods and services (transfer payments are not included)
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net exports (X-M)
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value of exports minus the value of imports
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real GDP
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the value of final goods and services produced in a given year when valued at the prices of a reference base year
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nominal GDP
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value of goods and services produced during a given year valued at the process that prevailed in the same year (more precise name for GDP)
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real GDP per person
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real GDP divided by the population
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potential GDP
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the value of real GDP when all the economy's labor, capital, land, and entrepreneurial ability are fully employed
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business cycle
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periodic but irregular up-and-down movement of total production and other measures of economic activity
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expansions
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period during which real GDP increase - from trough to peak
(basically going up)
(basically going up)
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recession
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period during which real GDP decreases - growth rate is negative for at least two successive quarters
(basically going down)
(basically going down)
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limitations of real GDP
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household production
underground economic activity
leisure time, environmental quality
underground economic activity
leisure time, environmental quality
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working age population
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the number of people aged 16 years and older who are not in jail, hospital, or some other institution
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labor force
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sum of employed and unemployed workers
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unemployment rate
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percentage of labor force that is unemployed
((number of people unemployed ÷ labor force)X100)
((number of people unemployed ÷ labor force)X100)
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labor force participation rate
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the percentage of the working-age population in the labor force (measures willingness of working age people)
((labor force ÷ working age population) X100)
((labor force ÷ working age population) X100)
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employment-to-population ratio
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the percentage of the working-age population that is employed
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marginally attached worker
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person who currently is neither working nor looking for work but has indicated that they are available for a job
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discouraged worker
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person who has stopped looking for a job
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frictional unemployment
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unemployment that occurs when people take time to find a job
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structural unemployment
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unemployment that results because the number of jobs available in some labor markets is insufficient to provide a job for everyone who wants one
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cyclical unemployment
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the higher than normal unemployment at a business cycle trough and the lower than normal unemployment at a business cycle peak
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natural unemployment rate
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natural unemployment as a percentage of the labor force
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full employment
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the level of employment reached when there is no cyclical unemployment
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output gap
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real GDP minus potential GDP
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price level
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average level of prices and the value of money
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inflation
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persistently rising price level
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deflation
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persistently falling price level
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hyperinflation
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inflation rate exceeds 50% per month
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CPI (consumer price index)
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measures the average of the prices paid by urban consumers for a "fixed" basket of consumer goods and services
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reference base period
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period for which the CPI is defined to equal 100. currently, the reference base period is 1982-1984.
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inflation rate
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percentage change in the price level from one year to the next
[(CPI this year-CPI last year) ÷ CPI last year] X100
[(CPI this year-CPI last year) ÷ CPI last year] X100
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new good bias
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new goods that were not available in the base year appear and, if they are more expensive than the goods they replace, they put an upward bias into the CPI.
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quality change bias
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quality improvements occur every year. part of the rise in the price is payment for improved quality and is not inflation.
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commodity substitution bias
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the market basket of goods used in calculating the CPI is fixed and does not take into account consumers' substitutions away from goods whose relative prices increase
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outlet substitution bias
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as the structure of retailing changes, people switch to buying from cheaper sources, but the CPI, as measured, does not take account of this outlet substitution
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chained CPI
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measures a lower inflation rate than the standard CPI
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personal consumption expenditure deflator
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(nominal consumption expenditure ÷ real consumption expenditure) x 100
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GDP deflator
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(nominal GDP/real GDP) X100
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core inflation rate
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calculated as the percentage change in the PCE index excluding the prices of food and fuel, the two most volatile prices
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