absolute advantage the ability to produce something more efficiently

capital productive equipment or machinery

comparative advantage the ability to produce something with a lower opportunity cost
economics a social science that studies how resources are used and is often concerned with how
resources can be used to their fullest potential
efficiency using resources to their maximum potential
labor all human activity that is productive
land all natural resources
law of Increasing costs law that states that when more of a product is initially being produced, the
higher the opportunity cost will be to produce still more
macroeconomics economic problems encountered by the nation as a whole
microeconomics economic problems faced by individual units within the overall company
opportunity cost the amount of one good that must be sacrificed to obtain an alternative good
positive economics economic analysis that draws conclusions based on logical deduction or
induction (value judgements are avoided)
production possibilities frontier the combinations of two goods that can be produced if the economy
uses all of its resources fully and efficiently
normative economies economies involving value judgement
resource anything that can be used to produce a good or service
allocative efficiency term for resources being deployed to produce just the right amount of each
product to satisfy society's wants
capitalism an economic system where supply and demand determine prices
circular flow diagram diagram that shows how households and firms are related by the exchange of
resources and products
command economy economy in which the central government dictates what will or will not be
produced and who gets what
the law of demand law that states that when the price of a product increases, the quantity
demanded decreases, ceteris paribus
law of supply law that states that when the price of a product increases, the quantity supplied
increases, ceterus paribus
mixed economy a blend of government commands and capitalism
consumption expenditures all the goods and services sold to households
disposable personal income (DPI) the income of households after taxes have been paid
government expenditures goods and services sold to governments
gross domestic product (GDP) dollar value of production within a nation's borders
gross national product (GNP) dollar value of production by a country's citizens
intermediate sales sales to firms that will incorporate the item into their final product
investment sales sales to firms that will incorporate the item into their final product
investment expenditures expenditures by businesses on plants and equipment plus the change in
business inventories
national income (NI) the income earned by households and profits earned by firms after subtracting
depreciation and indirect business taxes
national income and product accounts (NIPA) a comprehensive group of statistics that measures
various aspects of the economy's performance
net exports exports minus imports
personal income (PI) income received by households
real GDP GDP adjusted for the price changes
underground economy all the illegal production of goods and services and legal production that does
not pass through markets
GDP C+I+G+X
GDP per capita GDP/population
consumer price index (CPI) measure of the average change over time in the prices paid by urban
consumers for a market basket of consumer goods and services
cyclical unemployment loss of jobs by individuals during a recession and the corresponding slowdown in
production
fisher's hypothesis Nominal Interest Rate= Real Interest Rate + Expected Inflation
frictional unemployment state of being out of work because the person is in between jobs
GDP deflator measure of the level of prices in the economy
hidden unemployment describing those who are able to work but who are not actively seeking
employment because they are discouraged about their prospects for finding employment
inflation a sustained rise in most prices in the economy
menu cost the misallocation of resources because of inflation
nonaccelerating inflation rate of unemployment the full employment rate of unemployment; when
employment falls below this rate, inflation accelerates
seasonal unemployment state of being out of work because of the time of year
structural unemployment state of being out of work because the economy is structured, or set up,
to a person's disadvantage
unemployment rate the number of unemployed persons divided by the labor force
CPI (Total Cost this Period/Total Cost Base Period) x 100
Inflation rate [(this period CPI-previous period CPI)/previous period CPI] x 100
GDP deflator (GDP/Real GPD) x 100
Real GDP (GDP/GDP deflator) x 100
Nominal Interest Rate Real Interest Rate + Expected Inflation
Unemployment Rate Number of unemployed/civilian labor force
aggregate demand the demand for all goods and services by all households, business, governments,
and foreigners
aggregate supply the supply of all goods and services by all producers in the economy
break-even point point where the consumption function crosses the 45 degree line and income
equals spending so that saving is zero
business cycle a wave of economic activity comprised of an expansion and a recession
classical economic theory the predominant paradigm in economic analysis from about 1800 until
1930, based on Say's Law
consumption theory the relationship between consumer spending and income
equilibrium price level the price level that equates aggregate supply and aggregate demand, the
average level of prices in the economy
equilibrium quantity the amount of output that results in no shortage or surplus, the amount of
goods and service bought and sold in the economy
expansion a sustained improvement in economic activity
Keynesian theory theory that opposes Classical theory by emphasizing the short run and focusing
on economies that are operating below full capacity
marginal propensity to consume (MPC) idea that given an extra dollar, how much is spent?
multiplier an initial change in spending in the economy that will have a magnified, or multiplied,
effect on income
recession a sustained decline in economic activity
Say's Law theory that supply creates its own demand
MPC change in spending / change in income
Multiplier 1/(1-MPC)
total change in income Initial Change in Spending x Multiplier
automatic stabilizers government policies already in place that promote deficit spending during
recessions and surplus budgets during expansions
crowding out the increase in interest rates and subsequent decline in spending that occurs when the
government borrows money to finance a deficit
deficit situation that exists when government spending exceeds tax revenues
fiscal policy changes in government spending and taxes to fight recessions or inflations
inflationary gap what occurs when the equilibrium quantity of output is above potential output
Phillips tradeoff the inverse relationship between inflation and unemployment
rational expectations the idea that households and businesses will use all the information available to
them when making economic decision
recessionary gap what occurs when the equilibrium quantity of output is below potential output
stagflation term used to describe the situation when the economy experiences inflation and a
recession simultaneously
surplus spending by the government that is less than tax revenues
change in real GDP Initial Change in Spending x Multiplier
certificate of deposit debt instrument that is similar to a savings account except the interest rate is
slightly greater and the deposit cannot be drawn on without penalty
currency coins and paper money
discount rate the rate of interest the FED charges when it makes loans to depository institutions
excess reserves the amount of any deposit that does not have to be held aside and may be used to make
loans and buy investments
federal reserves the central bank of the United The United States
fiat money money that is not backed by any precious commodity
government securities IOUs that the government issues when it borrows money
liquidity the ability to turn an asset into cash rapidly and without loss
M1 currency, transaction accounts, and travelers' checks
M2 M1 plus savings accounts, certificates of deposit, and other liquid assets
money anything that society generally accepts in payment for a good or service
money multiplier 1/reserve requirement, the multiple by which the money supply will change
because of a change in bank reserves
open market operations activities in which the FED buys and sells government securities in the
secondary market
required reserves the amount of any deposit that must be held aside and not used to make loans
or buy investment
reserve requirement the percentage of any deposit that must be held aside and not used to amke
loans or buy investments
savings account an account at a depository institution that earns interest while the funds are readily
available but cannot be withdrawn with checks
secondary market place where government securities that have already been issued may be
bought or sold
transaction account a checking account at a bank or a similar account at some other depository
institution
money multiplier 1/ Reserve Requirement
change in money supply Money Multiplier x Change in Bank Reserves
board of governors executive board of the FED that makes major monetary policy decisions
demand management policy monetary and fiscal policy
equation of exchange M x V = P x Q; the money supply times its velocity equals the price level times
output
federal open market committee (FOMC) a committee within the FED that designs and executes the
particular of monetary policy
monetarist one who believes that changes in the money supply have a profound effect on the
economy
monetary neutrality policy in which a change in the money supply would result in a proportional
change in prices while real variables, such as the unemployment rate, would be unaffected
monetary policy changes in the money supply to fight recessions or inflations
money demand the amount that households and firms want to hold in currency and deposits
velocity of money describing the number of times the typical dollar of M1 or M2 is used to make
purchases during a year
equation of exchange M x V = P x Q
capital productivity the amount of output per unit of plant and equipment
economic growth growth of output usually measured by the percentage change in real GDP or real
GDP per capita
human capital the skill and knowledge embodied in the labor force
labor productivity the amount of output per unit of labor
potential GDP the amount that can be produced using resources fully and efficiently
productivity output per unit of input
total productivity the amount of all inputs
Rule of 70 years it takes a variable to double =70/the annual growth rate of the variable
appreciation the increase of the value of a currency in terms of another currency
balance of payments an accounting of the funds that flow in and out of a country comprised of the
capital account and the current account
balance of trade a nation's exports minus its imports
capital account a portion of the balance of payments comprised of foreign purchases of US assets minus
US purchases of foreign assets, plus the change in official reserves
closed economy a hypothetical economy with no foreign trade
current account a portion of the balance of payments comprised of the trade balance, net investment
income, and net transfers
depreciation the decrease of the value of a currency in terms of another currency
dumping the practice or foreign producers selling a product in the domestic market for less than
it cost to produce it
exchange rate the value of one country's currency in terms of another's
gold standard a unit of one currency that is equivalent to a stated amount of gold
import quota a limit on the amount of a product that can be imported
import tariff a tax on a specified import product
infant industries those industries that are just getting started, perhaps requiring trade
restrictions
intervention situation in which a nation or group of nations uses their official reserves to supply or
demand a currency in order to alter the exchange rate
managed float an exchange rate regime where supply and demand determine exchange rates with
occasional intervention when warranted
net investment income amount US citizens earned as interest and dividends from abroad minus how
much was paid to foreigners in interest and dividends
net transfers money our government and citizens send as gifts or aid to foreigners minus how much
foreigners send to us in gifts and aid
official reserves government's holdings of foreign currencies
open economy an economy with foreign trade
trade deficit excess of a nation's imports over its exports
trade surplus excess of a nation's exports of over its imports
balance of payments current account +capital account