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Macroeconomics
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The study of the overall aspects & workings of the economy of an entire state, nation, or society.
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GDP (Gross Domestic Product)
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The measure of the total value of everything produced within a specific economy over a defined period of time
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Per capita GDP
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GDP per person (GDP divided by population)
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Economic growth
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The percentage change in real per capita GDP
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Inflation
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The growth in overall levels of prices in an economy
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GDP deflator
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A measure of the price level used to calculate real GDP
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Nominal GDP
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GDP measured in current prices & not adjusted for inflation
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Real GDP
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GDP adjusted for inflation
nominal GDP / price level x 100
nominal GDP / price level x 100
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business cycle
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Short-run fluctuations around the long-run trend
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Market value
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Price per unit multiplied by the quantity produced
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Intermediate goods
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Goods that firms repackage or bundle with other goods to be sold at a later stage
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Final goods
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Goods sold to the final user
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GNP (Gross National Product)
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Output produced by workers and resources owned by residents of the nation
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Consumption
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the purchase of final goods & services by household
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Durable goods
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Goods that are consumed over a long period of time
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Investment
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Private spending on the tools, plant, & equipment used to produce future output
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Nonmarket goods
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Goods & services produced but not sold (ex: washing dishes, mowing lawn, etc.)
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Underground economy
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Transactions that are not reported to the government & therefore not taxed (ex: tipping a waitress in cash)
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Structural unemployment
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Unemployment that is caused by changes in the makeup of the economy; an inevitable aspect of living in a dynamic economy
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Creative destruction
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When the introduction of new products & technologies leads to the end of the lives of other products & technologies
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Frictional unemployment
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Unemployment caused by delays in matching available jobs with available workers
Will always exist no matter how healthy the economy is
Will always exist no matter how healthy the economy is
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Cyclical unemployment
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Unemployment caused by economic downturns - caused by an unhealthy economy
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Natural rate of unemployment
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The typical unemployment rate that occurs when the economy is growing normally (consists of structural & frictional unemployment)
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Unemployment rate
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The percentage of the labor force that is unemployed
Unemployed/labor force x 100
Unemployed/labor force x 100
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Labor force participation rate
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Percent of work-eligible population that is in the labor force
Labor force/work-eligible population x 100
Labor force/work-eligible population x 100
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CPI (Consumer Price Index)
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A measure of the price level based on the consumption pattern of a typical consumer
"Typical" consumer basket of goods
"Typical" consumer basket of goods
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Producer Price Index
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"Typical" producers' basket of intermediate goods & services
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Shoe-Leather Costs
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As price levels go up, it becomes more costly to hold idle money
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Money illusion
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People interpret nominal wage or price changes as real changes when they are not
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Menu costs
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The costs of changing prices (ex: printing new menus)
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Future price uncertainty
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Uncertainty about future prices which makes borrowing or lending riskier (wage & other input contracts often have long-term commitments)
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Wealth redistribution
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Inflation redistributes wealth between borrowers & lenders
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Price confusion
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Confusion on if higher prices are based on supply/demand, or just inflation
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Tax distortions
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inflation makes nominal income grow faster than real income
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Equation of exchange
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M x V = P x Q
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Loanable funds market
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The market where savers meet buyers
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Consumption smoothing
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Occurs when people borrow & save to smooth consumption over their lifetime
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Time preferences
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The fact that people prefer to receive goods and services sooner rather than later
- Strong = want it now
- Weak = willing to wait, more patient
- Strong = want it now
- Weak = willing to wait, more patient
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Financial intermediaries
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Firms that help channel funds from borrowers to savers
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Direct finance
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Borrowers go directly to savers for funds
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Indirect finance
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Savers lend funds to financial intermediaries, which then loan these funds to borrowers
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Bonds
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Formal "IOUs" - a contract specifying who owes how much and a date for repayment
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Default risk
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The risk that the borrower will not pay the face value of a bond on the maturity date
(greater risk = lower price, higher interest rate)
(greater risk = lower price, higher interest rate)
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Stocks
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Ownership shares in a firm
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Secondary markets
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Markets in which securities are traded after their first sale (ex: NYSE, NASDAQ)
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Treasury securities
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Bonds sold by U.S. government to pay for national debt of the U.S.
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Mortgages
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Loans that individuals use to pay for homes
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Securitization
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The creation of a new security by combining otherwise separate loan agreements
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