Economics (Chapter 23, 24, 25, 28)

Inward-oriented policies

(e.g., tariffs, limits on investment from abroad) Aim to raise living standards by avoiding interaction with other countries.

Outward-oriented policies

(e.g., the elimination of restrictions on trade or foreign investment) Promote integration with the world economy.

Foreign direct investment

A capital investment (e.g., a factory) that is owned & operated by a foreign entity

Foreign portfolio investment

A capital investment financed with foreign money but operated by domestic residents

Unemployment insurance (UI)

A govt program that partially protects workers' incomes when they become unemployed

GDP deflator

A measure of the overall level of prices.

The Circular-Flow Diagram

A simple depiction of the macroeconomy. It illustrates GDP as spending, revenue, factor payments, and income.

Union

A worker association that bargains with employers over wages, benefits, and working conditions

Government Purchases (G)

All spending on the g&s purchased by govt at the federal, state, and local levels.

Firms

Buy/hire factors of production, Use them to produce goods and services Sell goods & services

Sectoral shifts

Changes in the composition of demand across industries or regions of the country.

Constant returns to scale

Changing all inputs by the same percentage causes output to change by that percentage.

Government

Collects taxes, buys g&s

Not in the labor force

Everyone else

Capital goods

Excluded from CPI Included in GDP deflator (if produced domestically)

Efficiency wages

Firms voluntarily pay above-equilibrium wages to boost worker productivity.

Consumption (C) Investment (I) Government Purchases (G) Net Exports (NX)

Four Components of GDP

Worker turnover

Hiring & training new workers is costly. Paying high wages gives workers more incentive to stay, reduces turnover.

Public good

Ideas can be shared freely, increasing the productivity of many. Patent laws

Diminishing returns to capital

If workers have little K, giving them more increases their productivity a lot. If workers already have a lot of K, giving them more increases productivity fairly little.

Unmeasured Quality Change

Improvements in the quality of goods in the basket increase the value of each dollar. The BLS tries to account for quality changes but probably misses some, as quality is hard to measure. Thus, the CPI overstates increases in the cost of living.

Worker health

In less developed countries, poor nutrition is a common problem. Paying higher wages allows workers to eat better, makes them healthier, more productive.

Imported consumer goods

Included in CPI Excluded from GDP deflator

Factors of production

Inputs like labor, land, capital, and natural resources.

Final goods

Intended for the end user

Consumer Price Index (CPI)

It measures the typical consumer's cost of living

GDP

It measures total expenditure on the economy's output of g&s.

Gross Domestic Product (GDP)

It measures total income of everyone in the economy.

Financial system

Matches savers' supply of funds with borrowers' demand for loans

Net Exports (NX)

NX = exports - imports

Structural unemployment

Occurs when there are fewer jobs than workers Usually longer-term

Frictional unemployment

Occurs when workers spend time searching for the jobs that best suit their skills and tastes Short-term for most workers

Worker quality

Offering higher wages attracts better job applicants, increases quality of the firm's workforce.

Households

Own the factors of production, Sell/rent them to firms for income Buy and consume goods & services

Employed

Paid employees, self-employed, and unpaid workers in a family business

Factor payments

Payments to the factors of production (e.g., wages, rent).

Unemployed

People not working who have looked for work during previous 4 weeks

Saving and Investment

Reducing consumption = increasing saving.

Exports

Represent foreign spending on the economy's g&s.

Technological knowledge (A)

Society's understanding of the best ways to produce g&s

Introduction of New Goods

The CPI misses this effect because it uses a fixed basket of goods. Thus, the CPI overstates increases in the cost of living.

Substitution Bias

The CPI overstates increases in the cost of living. The CPI misses this substitution because it uses a fixed basket of goods.

Property rights

The ability of people to exercise authority over the resources they own.

Productivity

The average quantity of g&s produced per unit of labor input.

Cyclical unemployment

The deviation of unemployment from its natural rate

Natural resources (N)

The inputs into production that nature provides

Human capital (H)

The knowledge and skills workers acquire through education, training, and experience

GDP

The market value of all final goods & services produced within a country in a given period of time.

Natural rate of unemployment

The normal rate of unemployment around which the actual unemployment rate fluctuates

Imports

The portions of C, I, and G that are spent on g&s produced abroad.

Job search

The process of matching workers with appropriate jobs.

Catch-up effect

The property whereby poor countries tend to grow more rapidly than rich ones

Physical capital (K)

The stock of equipment and structures used to produce g&s

Microeconomics

The study of how individual households and firms make decisions, interact with one another in markets.

Macroeconomics

The study of the economy as a whole.

Labor force

The total number of workers, including the employed and unemployed.

Consumption (C)

The total spending by households on g&s.

Investment (I)

The total spending on goods that will be used in the future to produce more goods.

Population

The total sum of the people in labor force and not in labor force.

Foreign sector

Trades g&s, financial assets, and currencies with the country's residents

G excludes transfer payments, such as Social Security or unemployment insurance benefits.

Transfer payments

Intermediate goods

Used as components or ingredients in the production of other goods

Nominal GDP

Values output using current prices Not corrected for inflation

Real GDP

Values output using the prices of a base year Is corrected for inflation

Worker effort

Workers can work hard or shirk. Shirkers are fired if caught. Is being fired a good deterrent? Depends on how hard it is to find another job. If market wage is above eq'm wage, there aren't enough jobs to go around, so workers have more incentive to work not shirk.

Discouraged workers

would like to work but have given up looking for jobs classified as "not in the labor force" rather than "unemployed"