ECON 2133: CHAPTER 10
88 Cards in this Set
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microeconomics
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the study of how households and firms make decisions and how they interact in markets
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macroeconomics
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the study of economy-wide phenomena, including inflation, unemployment, and economic growth
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gross domestic product (GDP)
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the market value of all final goods and services produced within a country in a given period of time
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statistical discrepancy
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the difference between the two calculations of GDP
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(GDP) = C + I + G + NX
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What is the equation to calculate GDP?
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identity
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an equation that must be true because of how the variables in the equation are defined
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consumption
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spending by households on goods and services, with the exception of purchases of new housing
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investment
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spending on capital equipment, inventories, and structures, including household purchases of new housing
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government purchases
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spending on goods and services by local, state and federal government
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scarcity
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the limited nature of society's resources
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Principle #1
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People Face Trade-offs (principle #?)
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efficiency
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the property of society getting the most it can from its scarce resources
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equality
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the property of distributing economic prosperity uniformly among the members of society
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Principle #2
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The Cost of Something is What You Give Up To Get It (principle #?)
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opportunity cost
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whatever must be given up to obtain some item
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Principle #3
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Rational People Think at the Margin (principle #?)
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rational people
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people who systematically and purposefully do the best they can to achieve their objectives
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marginal changes
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small incremental adjustments to a plan of action
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Principle #4
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People Respond to Incentives (principle #?)
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incentive
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something that induces a person to act
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Principle #5
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Trade Can Make Everyone Better Off (principle #?)
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Principle #6
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Markets are Usually a Good Way to Organize Economic Activity
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market economy
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an economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services
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Principle #7
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Governments Can Sometimes Improve Market Outcomes (principle #?)
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property rights
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the ability of an individual to own and exercise control over scarce resources
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market failure
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a situation in which a market left on its own fails to allocate resources efficiently
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externality
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the impact of one person's actions on the well being of a bystander
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market power
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the ability of a single economic actor (or small group of actors) to have a substantial influence on market prices
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Principle #8
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A Country's Standard of Living Depends on It's Ability to Produce Goods and Services
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productivity
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the quantity of goods and services produced from each unit of labor input
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Principle #9
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Prices Rise When the Government Prints Too Much Money (principle #?)
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inflation
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an increase in the overall level of prices in the economy
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Principle #10
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Society Faces a Short-Run Trade-Off Between Inflation and Unemployment (principle #?)
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business cycle
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fluctuations in economic activity, such as employment and production
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circular-flow diagram
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a visual model of the economy that shows how dollars flow through markets among households and firms
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production possibilities frontier
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a graph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technology
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positive statements
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claims that attempt to describe the world as it is
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normative statements
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claims that attempt to prescribe how the world should be
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net exports
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spending on domestically produced goods by foreigners (exports) minus spending on foreign goods by domestic residents (imports)
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nominal GDP
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the production of goods and services valued at current prices
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real GDP
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the production of goods and services valued at constant prices
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GDP deflator
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a measure of the price level calculated as the ratio of nominal GDP to real GDP times 100
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consumer price index (CPI)
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the measure of the overall cost of the goods and services bought by a typical consumer
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inflation rate
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the percentage change in the price index from the preceding period
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producer price index
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a measure of the cost of a basket of goods and services bought by firms
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indexation
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the automatic correction by law or contract of a dollar amount for the effects of inflation
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nominal interest rate
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the interest rate as usually reported without a correction for the effects of inflation
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real interest rate
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the interest rate corrected for the effects of inflation
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productivity
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the quantity of goods and services produced from each unit of labor input
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physical capital
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the stock of equipment and structures that are used to produce goods and services
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human capital
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the knowledge and skills that workers acquire through education, training, and experience
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natural resources
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the inputs into the production of goods and services that are provided by nature, such as land, rivers, and mineral deposits
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technological knowledge
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society's understanding of the best ways to produce goods and services
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diminishing returns
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the property whereby the benefit from an extra unit of an input declines as the quantity of the input increases
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catch up effect
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the property whereby countries that start off poor tend to grow more rapidly than countries that start off rich
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GDP
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What is the best single measure of the economic well-being of a society?
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GDP per capita
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____ ____ ______ tells us the income and expenditure of the average person in the economy.
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The Bureau of Labor Statistics
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Who reports the Consumer Price Index each month?
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changes in the cost of living over time
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What is the Consumer Price Index used to measure?
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Fix the Basket (determine the goods)
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What is step 1 of calculating the consumer price index?
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Find the Prices
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What is step 2 of calculating the consumer price index?
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Compute the Basket's Cost
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What is step 3 of calculating the consumer price index?
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CPI
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The ____ is an accurate measure of the selected goods that make up the typical bundle, but it is not a perfect measure of the cost of living.
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substitution bias
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The basket (CPI) does not change to reflect consumer reaction to changes in relative prices. (consumers substitute toward goods that have become relatively less expensive) This is known as _____ ____.
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Introduction of New Goods
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The basket (CPI) does not reflect the change in purchasing power brought on by the introduction of new products. This is called the ______ _ ___ ____.
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Unmeasured Quality Changes
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If the quality of a good rises from one year to the next, the value of a dollar rises, even if the price of the good stays the same. This is called ________ _______ ________.
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overstate
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The substitution bias, introduction of new goods, and unmeasured quality changes cause the CPI to _________ the true cost of living.
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GDP deflator
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nominal GDP/ real GDP x 100 = ____ _______
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GDP deflator, consumer price index
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Economists and policy makers monitor both the ____ ______ and the _____ _____ ____ to see how quickly prices are rising.
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interest
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_____ represents a payment in the future for a transfer of money in the past.
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Real interest rate
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Nominal interest rate - inflation rate = ___ _____ ____.
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real interest rate
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___ ____ ____ measures changes in the purchasing power of money.
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economic growth rate
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The _____ ____ ____ is measured each year as the annual percentage growth rate in real GDP per person.
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2 percent
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In the United States over the past century, average income as measured by real GDP per person has grown by about ___ percent per year.
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compounding
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______ refers to the accumulation of a growth rate over a period of time.
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10 times
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The standard living in the rich countries is about ____ times the standard of living in the poor countries.
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productivity
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A nation's standard of living is higher the higher the _____ of its workers.
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factors of production
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The inputs used to produce goods and services are called ____ ___ ________.
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World Bank
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The ___ ____ is an organization that tries to encourage the flow of investment to poor countries.
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World Bank
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The ____ _____ obtains funds from developed counties such as the United States and makes loans to less-developed countries so that they can invest in roads, sewer systems, and other types of capital.
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10 percent
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In the United States, each year of schooling raises a person's wages, on average, by about ____ ______.
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brain drain
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The emigration of many of the most highly educated workers to rich countries is known as the:
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inward-oriented trade policies
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trade policies that avoid interactions with other countries
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outward-oriented trade policies
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trade policies that encourage interaction with other countries
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total income, total expenditure
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What two things does GDP measure?
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equal
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For an economy as a whole income must _____ expenditure.
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statistical discrepancy
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the difference between the two calculations of GDP
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identity
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an equation that must be true because of how the variables in the equation are defined
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ECON 2133: CHAPTER 10