Macroeconomics - Test #2
Investment Demand Curve
A curve that shows the amounts of investment demanded by an economy at a series of real interest rates. The level of investment depends on the expected rate of return and the real interest rate. It's a graphical depiction of the negative relation between investment expenditures and the interest rate, based on the marginal efficiency of investment for different capital investment projects. This curve is derived by plotting, from high to low, the marginal efficiency of investment for all possible capital investment projects. Because firms select those projects with returns greater than the interest rate on financial capital, this marginal efficiency of investment curve traces out the investment demand curve. Increases investment demand are shown as rightward shifts in the investment demand curve. Decreases in investment demand are shown as leftward shifts of the investment demand curve. Any factor that leads businesses collectively to expect greater rates of return on their investments increases investment demand. On the other hand, any factor that leads businesses collectively to expect lower rates of return on their investments shift the curve to the left. There are several non-interest-rate determinants of investment demand: acquisition, maintenance, and operating costs, business taxes, technological change, stock of capital goods on hand, planned inventory changes, and expectations. Basically, it reflects an inverse (negative) relationship between the real interest rate and investment.
Cyclical Unemployement
A type of unemployment caused by insufficient total spending (or by insufficient aggregate demand). This decline in total spending that causes cyclical unemployment typically begins in the recession phase of the business cycle. As the demand for goods and services decreases, employment falls and unemployment rises. Cyclical unemployment results from insufficient demand for goods and services. The 25% unemployment rate in the depth of the Great Depression in 1933 reflected mainly cyclical unemployment. Economists describe cyclical unemployment as the result of businesses not having enough demand for labor to employ all those who are looking for work. The lack of employer demand comes from a lack of spending and consumption in the overall economy. Fundamentally, cyclical unemployment is a factor of overall unemployment that relates to the cyclical trends in growth and production that occur within the business cycle. When business cycles are at their peak, cyclical unemployment will be low because total economic output is being maximized.
Average Propensity to Consume (APC)
Fraction (or percentage) of disposable income that households plan to spend for consumer goods and services; consumption divided by disposable income. The average propensity to consume (APC) refers to the percentage of income that is spent on goods and services rather than on savings. Economic periods where consumers are spending can boost the economy: more goods are purchased (high demand for goods and services); keeping more people employed and more businesses open. Periods where the tendency to save is increased can have a negative effect on the economy as people purchase fewer goods and services (low demand for goods and services), resulting in fewer jobs and increased business closures. For example, Mark's total disposable income is $80,000 ($100,000 of total income minus taxes of $20,000). Average propensity to consume equals total consumption expenditure of $60,000 divided by total disposable income (which is $80,000). This gives us an average propensity to consume (APC) of 75%. This tells that Mark intends to consume 75% of his disposable income and save 25%. APC = (consumption / income)
Demand-pull Inflation
Increases in the price level (inflation) resulting from an excess of demand over output at the existing price level, caused by an increase in aggregate demand. Basically, this is an increase in the price level caused by an excess of total spending beyond the economy's capacity to produce. When inflation is rapid and sustained, the cause invariably is an over-issuance of money by the central bank (the US Federal Reserve). When resources are already fully employed, the business sector cannot respond to excess demand by expanding output. So the excess of demand bids up the prices of the limited output, producing demand-pull inflation. The essence of this type of inflation is "too much spending chasing too few goods." This type of inflation is a result of strong consumer demand. When many individuals are trying to purchase the same good, the price will inevitably increase. When this happens across the entire economy for all goods, it is known as demand-pull inflation. In this scenario, demand is pulling the price level (inflation) upward.
Cost-push Inflation
Increases in the price level (inflation) resulting from an increase in resource costs (for example, raw-material prices) and hence in per-unit production costs; inflation caused by reductions in aggregate supply. The theory of cost-push inflation explains rising prices in terms of factors that raise per-unit production costs at each level of spending. A per-unit production cost is the average cost of a particular level of output. Rising per-unit production costs squeeze profits and reduce the amount of output firms are willing to supply at the existing price level. As a result, the economy's supply of goods and services declines and the price level rises. In this scenario, costs are pushing the price level upward, whereas in demand-pull inflation demand is pulling it upward. The major source of cost-push inflation has been so called supply shocks. Specifically, abrupt increases in the costs of raw materials or energy inputs have on occasion driven up per-unit production costs and thus product prices. The rocketing prices of imported oil in 1973 - 1974 and again in 1979 - 1980 are good illustrations. As energy prices surged upward during these periods, the costs of producing and transporting virtually every product in the economy rose—cost-push inflation ensued. Basically, cost-push inflation is a phenomenon in which the general price levels rise (inflation) due to increases in the cost of wages and raw materials.
Infrastructure
The capital goods usually provided by the public sector for use by citizens and firms (for example, highways, bridges, transit systems, wastewater treatment facilities, municipal water systems, and airpots). Public investment in the U.S. infrastructure has grown over the years. This publicly owned capital complements private capital. Investments in new highways promote private investment in new factories and retail stores along their routes. Industrial parts developed by local governments attract manufacturing and distribution firms. Private investment in infrastructure also plays a large role in economic growth. One example is the tremendous growth of private capital relating to communications systems over the years. These systems tend to be high-cost investments, however, they are vital to a country's economic development and prosperity. Infrastructure projects may be funded publicly, privately or through public-private partnerships. Infrastructure is also an asset class that tends to be less volatile than equities over the long term and generally provides a higher yield. As a result, some companies and individuals like to invest in infrastructure for its defensive characteristics. Individuals and institutions can invest in infrastructure through infrastructure funds and can even choose specialized funds, such as those that invest in transportation infrastructure or water infrastructure.
Marginal Propensity to Consume (MPC)
The fraction of any change in disposable income spent for consumer goods; equal to the change in consumption divided by the change in disposable income. "Marginal" in this instance has the meaning, "extra" or "a change in." A component of Keynesian theory, MPC represents the proportion of an aggregate raise in pay that is spent on the consumption of goods and services, as opposed to being saved. For example, suppose you receive a bonus with your paycheck, and it's $500 on top of your normal annual earnings. You suddenly have $500 more in income than you did before. If you decide to spend $400 of this marginal increase in income on a new business suit, your marginal propensity to consume will be 0.8 ($400 divided by $500). MPC = ( change in consumption / change in income )
Marginal Propensity to Save (MPS)
The fraction of any change in disposable income that households save; equal to the change in saving divided by the change in disposable income. The MPS is the ratio of a change in saving to the change in income that it brought about. If disposable income is $470 billion and household income rises by $20 billion to $490 billion, households will save (1/4) of that increase in income. So that MPS is .25. At its most basic level, it's a proportion of a small change in disposable income that would be saved, instead of being spent on consumption. It is computed by dividing the change in savings by the change in disposable income that caused the change. Because saving is the complement of consumption, the marginal propensity to save reflects key aspects about household consumption and saving activity. This activity is critical to the macroeconomy and the study of Keynesian economics. MPS = ( change in saving / change in income )
Expenditures Approach
The method that adds all expenditures made for final goods and services to measure the gross domestic product (GDP). This measurement is usually done for all expenditures for final goods and services throughout one year. The four main components are personal consumption expenditures (C), gross private domestic investment (I), government purchases of goods and services (G), and net exports (exports - imports or X_n). The largest of the four components are the personal consumption expenditures on goods (durable and nondurable) and services. The second largest component consists of the purchases made by federal, state, and local governments on final goods and services—these include spending on schools, roads, and military hardware, and the wages of government employees. Investment spending is the third largest component of the expenditure approach to GDP. This gross private domestic investment component is made up of the following items: all final purchases of machinery, equipment, and tools by business enterprises, all construction, and all changes in inventories. Finally, the smallest component is net exports. This includes the value of exports, goods produced in the United States and purchased in other countries. The value of imports, the purchases by U.S. citizens of foreign-produced goods, is subtracted from the value of exports.
Income Approach
The method that adds all the income generated by the production of final goods and services to measure the gross domestic product (GDP). This is the income derived from producing goods and services. It can be calculated by adding up all the money that was derived as income from the production of a particular year. The total receipts acquired from the sale of the total output are allocated to the suppliers of resources as wage, rent, interest, and profit. The first component that makes of the income approach, wages, is the takes the largest share of national income. These are the wages and salaries given to employees by business and government. This figure also includes wage and salary supplements, in particular, payments by employers into social insure and into a variety of private pension, health, and welfare funds for workers. Rents consist of the income received by the households and businesses that supply property shares. They include the monthly payments tenants make to landlords and the lease payments corporations pay for the use of office space. The figure used in the national accounts is net rent—gross rental income minus depreciation of the rental property. Third, interest income consists of the money paid by private businesses to the suppliers of loans used to purchase capital. It also includes such items as the interest households receive on savings deposits, certificates of deposits (CDs), and corporate bonds. Fourth, proprietors' income, loosely termed "profits," is broken down by the national income accountants into two accounts: proprietors' income, which consists of the net income of sole proprietorships, partnerships, and other unincorporated businesses; and corporate profits (corporate incomes taxes, dividends, and undistributed corporate profits). Also, taxes on production and imports are is measured when calculated GDP through the income approach. These include general sales taxes, excise taxes, business property taxes, license fees, and customs duties. Finally, the depreciate of the value of goods, and the net foreign factor income needed to added in. When moving from national income to GDP, accountants must take out the income Americans gained from supplying resources abroad and add in the income that foreigners gain by supplying resources in the U.S.
National Income Accounting
The techniques used to measure the overall production of the economy and other related variables for the nation as a whole. This accounting records the level of activity in accounts such as total revenues earned by domestic corporations, wages paid to foreign and domestic workers, and the amount spend on sales and incomes taxes by corporations and individuals residing in the country. National income accounting does for the economy as a whole what private accounting does for the individual firm or for the individual household. The Bureau of Economic Analysis (BEA), an agency of the Commerce Department, compiles the National Income and Product Accounts (NIPA) for the U.S. economy. This accounting (which operates in a very similar fashion to the accounting done for businesses), enables economists and policymakers to do three things (if not more): assess the health of the economy by comparing levels of production at regular intervals, track the long-run course of the economy to see whether it has grown, been constant, or declined, and formulate policies that will safeguard and improve the economy's health. At its most basic level, this national income accounting is the term that a national government uses to measure the level of the country's economic activity in a given period of time.
Economic Investment
spending for the production and accumulation of capital and additions to inventories. This kind of investment (in contrast to financial investment) relates to the creation and expansion of business enterprises. Of course, these types of investment are not monetary investments (like stocks or bonds), rather, spending on the production and accumulation of newly created capital goods such as machinery, tools, factories, and warehouses. For example, economic investment occurs when a factory purchases new a new machine that will help speed up the production of their goods. These economic investments are in capital goods that are not consumed today, but are used in the future to create wealth.
Modern Economic Growth
the historically recent phenomenon in which nations for the first time have experienced sustained increases in real GDP per capita. Our current era is characterized by sustained and ongoing increases in living standards that can cause dramatic increases in the standard of living within less than a single human life. For example, the steam engine, telephone, and computer are all inventions that led to large increases in the modern standard of living as well as increases in real GDP per capita. Culturally, the vast increases in wealth and living standards have allowed ordinary people for the first time in history to have significant time for leisure activities and arts. Socially, countries experiencing modern economic growth have abolished feudalism, instituted universal public education, and largely eliminated ancient social norms and legal restrictions against women and minorities doing certain jobs or holding certain positions. Politically, counties experiencing modern economic growth have tended to move toward democracy, a form of government that was extremely rare before the start of the industrial revolution. Economic growth can be measured in nominal terms, which include inflation, or in real terms, which are adjusted for inflation. For comparing one country's economic growth to another, GDP or GNP per capita should be used as these take into account population differences between countries.
Labor Force Participation Rate
the percentage of the working-age population that is actually in the labor force. This is important when determining the number of hours of labor each year. The house of labor input depend on the size of the employed labor force and the length of the average workweek. Along with the labor force participation rate, the labor-force size depends on the size of the working-age population. This participation rate includes those working-age persons in an economy who are employed, and those who are unemployed, but looking for a job. Typically "working-age persons" is defined as people between the ages of 16-64. People in those age groups who are not counted as participating in the labor force are typically students, homemakers, and persons under the age of 64 who are retired. In the United States the labor force participation rate is usually around 67-68%.
Financial Investment
the purchase of a financial asset (such as a stock, bond, or mutual fund) or real asset (such as a house, land, or factories) or the building of such assets in the expectation of financial gain. Financial investment is what people normally think of when they hear the term "investment," understanding it as way to make their money grow. Anything of monetary value is an asset and, in everyday usage, people purchase (or "invest" in) assets hoping to receive a financial gain, either by eventually selling them at higher prices than they paid for them or by receiving a stream of payments from others who are allowed to use the asset. Financial investment is contrasted with economic investment, where spending goes towards the production and accumulation of newly created capital goods.
