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ECON 2133: CHAPTER 10

microeconomics
the study of how households and firms make decisions and how they interact in markets
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macroeconomics
the study of economy-wide phenomena, including inflation, unemployment, and economic growth
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gross domestic product (GDP)
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
the difference between the two calculations of GDP
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(GDP) = C + I + G + NX
What is the equation to calculate GDP?
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identity
an equation that must be true because of how the variables in the equation are defined
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consumption
spending by households on goods and services, with the exception of purchases of new housing
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investment
spending on capital equipment, inventories, and structures, including household purchases of new housing
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government purchases
spending on goods and services by local, state and federal government
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scarcity
the limited nature of society's resources
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Principle #1
People Face Trade-offs (principle #?)
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efficiency
the property of society getting the most it can from its scarce resources
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equality
the property of distributing economic prosperity uniformly among the members of society
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Principle #2
The Cost of Something is What You Give Up To Get It (principle #?)
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opportunity cost
whatever must be given up to obtain some item
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Principle #3
Rational People Think at the Margin (principle #?)
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rational people
people who systematically and purposefully do the best they can to achieve their objectives
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marginal changes
small incremental adjustments to a plan of action
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Principle #4
People Respond to Incentives (principle #?)
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incentive
something that induces a person to act
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Principle #5
Trade Can Make Everyone Better Off (principle #?)
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Principle #6
Markets are Usually a Good Way to Organize Economic Activity
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market economy
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
Governments Can Sometimes Improve Market Outcomes (principle #?)
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property rights
the ability of an individual to own and exercise control over scarce resources
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market failure
a situation in which a market left on its own fails to allocate resources efficiently
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externality
the impact of one person's actions on the well being of a bystander
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market power
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
A Country's Standard of Living Depends on It's Ability to Produce Goods and Services
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productivity
the quantity of goods and services produced from each unit of labor input
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Principle #9
Prices Rise When the Government Prints Too Much Money (principle #?)
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inflation
an increase in the overall level of prices in the economy
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Principle #10
Society Faces a Short-Run Trade-Off Between Inflation and Unemployment (principle #?)
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business cycle
fluctuations in economic activity, such as employment and production
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circular-flow diagram
a visual model of the economy that shows how dollars flow through markets among households and firms
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production possibilities frontier
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
claims that attempt to describe the world as it is
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normative statements
claims that attempt to prescribe how the world should be
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net exports
spending on domestically produced goods by foreigners (exports) minus spending on foreign goods by domestic residents (imports)
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nominal GDP
the production of goods and services valued at current prices
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real GDP
the production of goods and services valued at constant prices
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GDP deflator
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)
the measure of the overall cost of the goods and services bought by a typical consumer
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inflation rate
the percentage change in the price index from the preceding period
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producer price index
a measure of the cost of a basket of goods and services bought by firms
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indexation
the automatic correction by law or contract of a dollar amount for the effects of inflation
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nominal interest rate
the interest rate as usually reported without a correction for the effects of inflation
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real interest rate
the interest rate corrected for the effects of inflation
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productivity
the quantity of goods and services produced from each unit of labor input
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physical capital
the stock of equipment and structures that are used to produce goods and services
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human capital
the knowledge and skills that workers acquire through education, training, and experience
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natural resources
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
society's understanding of the best ways to produce goods and services
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diminishing returns
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
the property whereby countries that start off poor tend to grow more rapidly than countries that start off rich
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GDP
What is the best single measure of the economic well-being of a society?
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GDP per capita
____ ____ ______ tells us the income and expenditure of the average person in the economy.
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The Bureau of Labor Statistics
Who reports the Consumer Price Index each month?
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changes in the cost of living over time
What is the Consumer Price Index used to measure?
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Fix the Basket (determine the goods)
What is step 1 of calculating the consumer price index?
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Find the Prices
What is step 2 of calculating the consumer price index?
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Compute the Basket's Cost
What is step 3 of calculating the consumer price index?
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CPI
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
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
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
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
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
nominal GDP/ real GDP x 100 = ____ _______
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GDP deflator, consumer price index
Economists and policy makers monitor both the ____ ______ and the _____ _____ ____ to see how quickly prices are rising.
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interest
_____ represents a payment in the future for a transfer of money in the past.
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Real interest rate
Nominal interest rate - inflation rate = ___ _____ ____.
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real interest rate
___ ____ ____ measures changes in the purchasing power of money.
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economic growth rate
The _____ ____ ____ is measured each year as the annual percentage growth rate in real GDP per person.
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2 percent
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
______ refers to the accumulation of a growth rate over a period of time.
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10 times
The standard living in the rich countries is about ____ times the standard of living in the poor countries.
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productivity
A nation's standard of living is higher the higher the _____ of its workers.
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factors of production
The inputs used to produce goods and services are called ____ ___ ________.
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World Bank
The ___ ____ is an organization that tries to encourage the flow of investment to poor countries.
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World Bank
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
In the United States, each year of schooling raises a person's wages, on average, by about ____ ______.
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brain drain
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
trade policies that avoid interactions with other countries
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outward-oriented trade policies
trade policies that encourage interaction with other countries
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total income, total expenditure
What two things does GDP measure?
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equal
For an economy as a whole income must _____ expenditure.
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statistical discrepancy
the difference between the two calculations of GDP
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identity
an equation that must be true because of how the variables in the equation are defined
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