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Microeconomics
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Examines the functioning of individual industries and the behavior of individual decision-making units - firms and households
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Macroeconomics
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Deals with the economy as a whole. Focuses on the determinants of total national income, deals with aggregates such as aggregate consumption and investment, and looks at the overall level of prices instead of individual prices
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Aggregate behavior
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The behavior of all households and firms together
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Sticky prices
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Prices do not always adjust rapidly to maintain equality between quantity supplied and quantity demanded
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3 major concerns of macroeconomics
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output growth, unemployment, inflation and deflation
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Business Cycle
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The cycle of short-term ups and downs in the economy
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Aggregate output
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The total quantity of goods and services produced in an economy in a given period
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Expansion or Boom
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The period in the business cycle from a trough up to a peak during which output and employment grow
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Contraction, recession, or slump
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The period in the business cycle from a peak down to a trough during which output and employment fall
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Depression
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A prolonged and deep recession
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Unemployment rate
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The percentage of the labor force that is unemployed
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Inflation
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An increase in the overall price level
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Hyperinflation
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A period of very rapid increases in the overall price level
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Deflation
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A decrease in the overall price level
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4 participants in the economy
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households, firms, the government, the rest of the world
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Private sector
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Households and firms
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Public sector
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The government
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The foreign sector
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The rest of the world
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Circular Flow
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A diagram showing the flows in and out of the sectors in the economy
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Transfer payments
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Cash payments made by the government to people who do not supply goods, services, or labor in exchange for these payments. They include Social Security benefits, veterans' benefits, and welfare payments
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3 Market Arenas
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The goods and services market, the labor market, and the money (financial) market
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Goods and services market
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Households and the government purchase goods and services from firms in this market.
Firms purchase goods and services from each other and also supply this market.
Households, the government, and firms demand from this market.
The rest of the world buys from and sells to this market.
Firms purchase goods and services from each other and also supply this market.
Households, the government, and firms demand from this market.
The rest of the world buys from and sells to this market.
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Labor Market
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Households supply labor, and firms and the government demand labor
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Money market
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households supply funs with the expectation of earning income in the form of dividends on stocks and interest on bonds. Households demand (borrow) funds from this market to finance various purchases. Firms borrow funds to build new facilities
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Treasury bonds, notes, or bills
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Promissory notes issued by the federal government when it borrows money
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Corporate bonds
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Promissory notes issued by corporations when they borrow money
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Shares of stock
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Financial instruments that give to the holder a share in the firm's ownership and therefore the right to share in the firm's profits
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Dividends
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The portion of a firm's profits that the firm pays out each period to its shareholders
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Fiscal policy
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Government policies concerning taxes and spending
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Monetary policy
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The tools used by the Federal Reserve to control short-term interest rates
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Great Depression
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The period of severe economic contraction and high unemployment that began in 1929 and continued throughout the 1930s
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Fine-tuning
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The phrase used by Walter Heller to refer to the government's role in regulating inflation and unemployment
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Stagflation
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A situation of both high inflation and high unemployment
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National income and product accounts
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Data collected and published by the government describing the various components of national income and output in the economy
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Gross Domestic Product (GDP)
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The total market value of all final goods and services produced within a given period by factors of production located within a country
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Final goods and services
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Goods and services produced for final use
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Intermediate goods
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Goods that are produced by one firm for use in further processing or for resale by another firm
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Value added
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The difference between the value of goods as they leave a stage of production and the cost of the goods as they entered that stage
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Calculating GDP
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Sum up the value added at each stage of production or take the value of final sales
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Exclusion of Used Goods and Paper Transactions
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GDP is concerned only with new, or current production. Old output is not counted in current GDP, GDP does not count transactions in which money or goods change hands but in which no new goods and services are produced
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Gross National Product (GNP)
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The total market value of all final goods and services produced within a given period by factors of production owned by a country's citizens, regardless of where the output is produced
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Expenditure approach
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A method of computing GDP that measures the total amount spent on all final goods and services during a given period
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Income approach
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A method of computing GDP that measures the income (wages, rents, interests, and profits) received by all factors of production in producing final goods and services
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4 main categories of expenditure
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Personal consumption expenditures (C), Gross domestic investment (I^a), Government consumption and gross investment (G), and Net exports (EX-IM)
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Personal consumption expenditures (C)
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household spending on consumer goods
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gross private domestic investment (I^a)
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spending by firms and households on new capital (plant, equipment, inventory, and new residential structures)
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Net Exports (EX - IM)
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net spending by the rest of the world, or exports (EX) minus imports (IM)
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Durable goods
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Goods that last a relatively long time, such as cars and household appliances
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Nondurable goods
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Goods that are used up fairly quickly, such as food and clothing
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Services
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The things we buy that do not involve the production of physical things, such as legal and medical services and education
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nonresidential investment
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Expenditures by firms for machines, tools, plants, and so on
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Residential investment
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Expenditures by households and firms on new houses and apartment buildings
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changes in business inventories
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The amount by which firms' inventories change during a period. Inventories are the goods that firms produce now but intend to sell later
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Depreciation
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The amount by which an asset's value falls in a given period
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Gross investment
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The total value of all newly produced capital goods (plant, equipment, housing, and inventory) produced in a given period
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Net investment
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gross investment minus depreciation
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National Income
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The total income earned by the factors of production owned by a country's citizens
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Compensation of employees
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Includes wages, salaries, and various supplements paid to households by firms and by the government
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Proprietors' income
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the income of unincorporated businesses
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Rental income
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The income received by property owners in the form of rent
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corporate profits
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The income of corporations
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Net interest
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The interest paid by business
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Indirect taxes minus subsidies
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Taxes such as sales taxes, customs duties, and license fees less subsidies that the government pays for which it receives no goods or services in return
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Net business transfer payments
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Net transfer payments by businesses to others
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Surplus of government enterprises
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income of government enterprises
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Net National Product (NNP)
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Gross national product minus depreciation; a nation's total product minus what is required to maintain the value of its capital stock
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statistical discrepancy
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data measurement error
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Personal income
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The total income of households
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Disposable personal income or after-tax income
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Personal income minus personal income taxes. The amount that households have to spend or save
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Personal saving
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The amount of disposable income that is left after total personal spending in a given period
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Personal saving rate
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The percentage of disposable personal income that is saved. If the personal saving rate is low, households are spending a large amount relative to their incomes; if it is high, households are spending cautiously
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Current dollars
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The current prices that we pay for goods and services
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Nominal GDP
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GDP measured in current dollars
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Weight
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The importance attached to an item within a group of items
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Base year
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The year chosen for the weights in a fixed-weight procedure
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Fixed-weight procedure
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A procedure that uses weights from a given base year
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Problems of Fixed Weights
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It does not account for the responses in the economy to supply shifts
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Limitations of the GDP concept
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A decrease in crime is not reflected in GDP, an increase in leisure is sometimes associated with a decrease in GDP, most non-market and domestic activities are not counted in GDP
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Informal Economy
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The part of the economy in which transactions take place and in which income is generated that is unreported and therefore not counted in GDP
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Gross national income (GNI)
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GNO converted into dollars using an average of currency exchange rates over several years adjusted for rates of inflation
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Employed
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16 years or older (1) who works for pay, either for someone else or in his or her own business for 1 or more hours per week, (2) who works without pay for 15 or more hours per week in a family enterprise, or (3) who has a job but has been temporarily absent with or without pay
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Unemployed
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16 years or older who is not working, is available for work, and has made specific efforts to find work during the previous 4 weeks
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Not in the labor force
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A person who is not looking for work because he or she does not want a job or has given up looking
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labor force
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The number of people employed plus the number of unmployed
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Unemployment rate (unemployed/employed + unemployed)
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The ratio of the number of people unemployed to the total number of people in the labor force
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Labor force participation rate (labor force/population)
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The ratio of the labor force to the total population 16 years old or older
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Discouraged-worker effect
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The decline in the measured unemployment rate that results when people who want to work but cannot find jobs grow discouraged and stop looking, thus dropping out of the ranks of the unemployed and the labor force
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3 categories of unemployment
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Frictional, structursl, cyclical
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frictional unemployment
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The portion of unemployment that is as a result of the normal turnover in the labor market; used to denote short-run job/skill-matching problems
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structural unemployment
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The portion of unemployment that is a result of changes in the structure of the economy that result in a significant loss of jobs in certain industries
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natural rate of unemployment
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The unemployment rate that occurs as a normal part of the functioning of the economy. Sometimes taken as the sum of the frictional unemployment rate and the structural unemployment rate.
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Cyclical unemployment
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unemployment that is above frictional plus structural unemployment
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Consumer price index (CPI)
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A price index computed each month of the Bureau of Labor Statistics using a bundle that is meant to represent the "market basket" purchased monthly by the typical urban consumer
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Producer price indexes (PPIs)
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Measure of prices that producers receive for products at all stages in the production process
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Real interest rate
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The difference between the interest rate on a loan and the inflation rate
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Anticipated inflation
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Interest rates rise
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Output growth
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The growth rate of the output of the entire economy
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Per-capita output growth
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The growth rate of output per person in the economy
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Productivity growth
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The growth rate of output per worker
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