MACRO- Ch.5-8

nominal gross domestic product (GDP)

GDP measured in terms of the price level at the time of measurement; GDP not adjusted for inflation. Compare with real gross domestic product (real GDP). real GDP Gross domestic product adjusted for inflation; gross domestic product in a year divided by the GDP price index for that year, the index expressed as a decimal. Compare with nominal GDP.

direct controls

Government policies that directly constrain activities that generate negative externalities.

expenditures approach

The method that adds all expenditures made for final goods and final services to measure the gross domestic product.

income approach

The method that adds all the income generated by the production of final goods and final services to measure the gross domestic product.

value-added

The value of a product sold by a firm less the value of the products (materials) purchased and used by the firm to produce that product.

base year

The year with which other years are compared when an index is constructed; for example, the base year for a price index.

Secondhand Sales contribute nothing to current production and are therefore excluded from GDP.

contribute nothing to current production and are therefore excluded from GDP.

Economic investment

creation of new productive capital, either new tools or new recipes

Positive changes in inventory

economy produced more output than people purchased which was left in inventory of unsold products

Negative changes in inventory

economy sold more of output than produced in a year by selling goods produced in prior years

producer surplus

is the difference between the actual price a producer receives (or producers receive) and the minimum price that a consumer would have to pay the producer to make a particular unit of output available.

Efficiency

maximum willingness to pay, indicated on the demand curve, equals minimum acceptable prices, shown by the points on the supply curve

nominal gross domestic product

measured in terms of the price level at the time of measurement; GDP not adjusted for inflation.

real GDP

measures the value of the final goods and services produced within a country's borders during a specific period of time, typically a year.

investment

occurs when resources are devoted to increasing future output

non -market activities

productivities that dont take place in any market like carpenters who repair their own homes

Financial transactions

public transfer payments (such as social security payments), private transfer payments (such as allowance money that parents give children or the cash gifts given during the holidays), stock market transactions.

positive demand shock

refers to a situation in which actual demand is higher than expected

negative demand shock

refers to a situation in which actual demand is lower than expected.

Dividends

the part of after-tax profits that corporations choose to pay out, or distribute, to their stockholders. They thus flow to households, which are the ultimate owners of all corporations.

price index

An index number that shows how the weighted-average price of a "market basket" of goods changes over time relative to its price in a specific base year.

Undistributed corporate profits

Any after-tax profits that are not distributed to shareholders are saved, or retained, by corporations to be invested later in new plants and equipment.

GDP Price Index

Our first method for calculating real GDP proceeds in three stages. First, we assemble data on the price changes that occurred over various years . Then we use those price changes to establish an overall price index for the entire period. Finally, we use the index value for a particular year to adjust that year's nominal GDP into that year's real GDP.

disposable income (DI)

Personal income less personal taxes; income available for personal consumption expenditures and personal saving.

intermediate goods and services

Products that are purchased for resale or further processing or manufacturing.

final goods and services

Products that have been purchased for final use (rather than for resale or further processing or manufacturing.)

business cycle

Recurring increases and decreases in the level of economic activity over periods of years; consists of peak, recession, trough, and expansion phases.

efficiency losses

Reductions in combined consumer and producer surplus caused by an underallocation or overallocation of resources to the production of a good or service. Also called deadweight loss.

deadweight loss

Reductions in combined consumer and producer surplus caused by an underallocation or overallocation of resources to the production of a good or service. Also called efficiency loss.

positive externality

A benefit obtained without compensation by third parties from the production or consumption of sellers or buyers. Example: A beekeeper benefits when a neighboring farmer plants clover. Also known as an external benefit or a spillover benefit.

durable good

A consumer good with an expected life (use) of three or more years. nondurable good A consumer good with an expected life (use) of less than three years. service An (intangible) act or use for which a consumer, firm, or government is willing to pay.

negative externality

A cost imposed without compensation on third parties by the production or consumption of sellers or buyers. Example: A manufacturer dumps toxic chemicals into a river, killing fish prized by sports fishers. Also known as an cost or a spillover cost.

externality

A cost or benefit from production or consumption that accrues to someone other than the immediate buyers and sellers of the product being produced or consumed (see negative externality and positive externality).

taxes on production and imports

A national income accounting category that includes such taxes as sales, excise, business property taxes, and tariffs that firms treat as costs of producing a product and pass on (in whole or in part) to buyers by charging a higher price.

adverse selection problem

A problem arising when information known to one party to a contract or agreement is not known to the other party, causing the latter to incur major costs. Example: Individuals who have the poorest health are most likely to buy health insurance.

asymmetric information

A situation where one party to a market transaction has more information about a product or service than the other. The result may be an under- or overallocation of resources.

Pigovian tax

A tax or charge levied on the production of a product that generates negative externalities. If set correctly, the tax will precisely offset the overallocation (overproduction) generated by the negative externality.

consumption of fixed capital

An estimate of the amount of capital worn out or used up (consumed) in producing the gross domestic product; also called depreciation.

saving

Disposable income not spent for consumer goods; equal to disposable income minus personal consumption expenditures

government purchases (G)

Expenditures by government for goods and services that government consumes in providing public services as well as expenditures for publicly owned capital that has a long lifetime; the expenditures of all governments in the economy for those final goods and final services.

gross private domestic investment (Ig)

Expenditures that increase the nation's stock of capital, which is the collection of physical objects and intangible ideas that help to produce goods and services. Includes spending on final purchases of plant, machinery, and equipment by business enterprises; residential construction; changes in inventories; expenditures on the research and development (R&D) of new productive technologies; and money spent on the creation of new works of art, music, writing, film, and software.

net domestic product (NDP)

Gross domestic product less the part of the year's output that is needed to replace the capital goods worn out in producing the output; the nation's total output available for consumption or additions to the capital stock.

net private domestic investment

Gross private domestic investment less consumption of fixed capital; the addition to the nation's stock of capital during a year.

allocative efficiency

The apportionment of resources among firms and industries to obtain the production of the products most wanted by society (consumers); the output of each product at which its marginal cost and marginal benefit are equal, and at which the sum of consumer surplus and producer surplus is maximized.

consumer surplus

The difference between the maximum price a consumer is (or consumers are) willing to pay for an additional unit of a product and its market price; the triangular area below the demand curve and above the market price.

gross output (GO)

The dollar value of the economic activity taking place at every stage of production and distribution. By contrast, gross domestic product (GDP) only accounts for the value of final output.

personal income (PI)

The earned and unearned income available to resource suppliers and others before the payment of personal taxes.

personal consumption expenditures (C)

The expenditures of households for both durable and nondurable consumer goods.

modern economic growth

The historically recent phenomenon in which nations for the first time have experienced sustained increases in real GDP per capita.

Coase theorem

The idea, first stated by economist Ronald Coase, that some externalities can be resolved through private negotiations among the affected parties.

market failure

The inability of a market to bring about the allocation of resources that best satisfies the wants of society; in particular, the overallocation or underallocation of resources to the production of a particular good or service because of externalities, asymmetric information, or because markets fail to provide desired public goods.

moral hazard problem

The possibility that individuals or institutions will behave more recklessly after they obtain insurance or similar contracts that shift the financial burden of bad outcomes onto others. Example: A bank whose deposits are insured against losses may make riskier loans and investments.

productive efficiency

The production of a good in the least costly way; occurs when production takes place at the output level at which per-unit production costs are minimized.

optimal reduction of an externality

The reduction of a negative externality such as pollution to the level at which the marginal benefit and marginal cost of reduction are equal.

total surplus

The sum of consumer surplus and producer surplus; a measure of social welfare; also known as social surplus.

social surplus

The sum of consumer surplus and producer surplus; a measure of social welfare; also known as total surplus.

national income accounting

The techniques used to measure the overall production of a country's economy as well as other related variables.

Corporate income taxes

These taxes are levied on corporations' profits. They flow to the government.

national income

Total income earned by resource suppliers for their contributions to gross domestic product plus taxes on production and imports; the sum of wages and salaries, rent, interest, profit, proprietors' income, and such taxes.

real GDP

adjusted for inflation; gross domestic product in a year divided by the GDP price index for that year, the index expressed as a decimal.

NOT FLEXIBLE

When prices are __________ the shift in the demand curve causes a change in the units supplied at that price level

multiple counting

Wrongly including the value of intermediate goods in the gross domestic product; counting the same good or service more than once.

Domestic Output Only GDP

a Japanese-owned Toyota factory in Ohio would count as US GDP because it's within the nation's borders but an American-owned ford factory in Canada would not count as US GDP because it's outside of the US boundaries.

Economical investment

activities that increase the nation's stock of capital, which is the collection of human-made resources that help to produce goods and services

Statistical discrepancy

an additional number added to GDP totals to equalize it for mistakes that might have been made

Financial investment

buying stocks or selling bonds, merely transfer the ownership of existing assets; they do not produce new capital goods.

adding sales value of final products only

how to avoid multiple counting?

Recipes

intangible methods, techniques, and management practices necessary to produce goods and services

Tool

tangible physical objects that help to produce goods and services. such as final purchases and housing services

sticky prices

this can be measured by looking at the length of time between the change in the market and the price changes in goods and services

Monetary measure

to add dissimilar items, they must share a common unit of measurements like dollar value or weight

FLEXIBLE

under _______ prices, production will stay the same and demand will shift

demand shock

unexpected changes in the demand for goods and services

supply shock

unexpected changes in the supply of goods and services

Underground economy

when participants do not report their earnings such as drug dealers or a barista not reportings only a portion of their tips received from customers.

nominal GDP

which is the dollar value of all goods and services produced within a country's borders using their prices during the year they were produced.