MACROECONOMIC DEFINITIONS-PART 1
*STARRED ITEMS WILL BE CONSIDERED ONLY FOR EXTRA CREDIT
DEFINITIONS.
01. GROSS DOMESTIC
PRODUCT (GDP): GDP is measured by the market value of all final goods and
services produced within a country in a given period of time.
02. NOMINAL GDP: The GDP of a given
year as calculated in the prices of that year.
03. REAL GDP: Nominal GDP
adjusted for the effects of inflation as measured by some price index. Such
adjustments allow comparison of GDPs of different years so that the amount of
real economic growth can be determined
04. RECESSION PHASE:
Measured by the decline in Real GDP between the peak (P) of a business cycle
and the trough (T). when real GDP declines for at
least six consecutive months (two consecutive quarters).
05. RECOVERY PHASE:
measured by the increase in Real GDP between the trough of the cycle and the
level of Real GDP at the previous peak.
06. EXPANSION PHASE:
Measured by the increase in Real GDP between the level of Real GDP at the
previous peak and the level of Real GDP at the next peak of the cycle.
07. BUSINESS CYCLE: The fluctuation in
real GDP over time which is composed of three phases: a recession phase, a
recovery phase, and an expansion phase where real GDP increases over time until
it reaches a peak again. These phases comprise a complete business cycle.
08. EMPLOYMENT: The number of people
employed in the economy. Anyone who works as little as one hour a week for pay
in the survey week is considered to be in this category.
09. UNEMPLOYMENT: The number of people
who are unemployed. People are unemployed if (1) they did no work in the survey
week, (2) they looked for work sometime in the last four weeks, and (3) they
were available for work. Alternatively, people are unemployed if they are
between jobs and will start a new job in less than 30 days.
10. NOT IN THE LABOR FORCE: Anyone who
is not employed or unemployed; anyone who is not in the labor force. This group
includes housewives, retirees, and full-time students.
11. THE NATURAL RATE OF UNEMPLOYMENT:
The normal rate of unemployment around which the actual unemployment rate
fluctuates. (NOTE: How is the normal rate of unemployment determined?)
12. DISCOURAGED WORKER: Anyone who has
looked for work with a given reservation wage in mind for a significant time
period and has dropped out of the labor force because he cannot find work.
13. UNDERGROUND WORKER:
Anyone who works in activities which pay cash to avoid taxes, costly
regulations, or government prohibitions. Such persons are officially
classified as unemployed or “not in labor force” while they are more accurately
categorized as being employed.
14. PHANTOM UNEMPLOYMENT: Those who are
collecting welfare benefits or unemployment insurance must register with the Employment
Service which attempts to find jobs for such persons. A significant number of
these persons so registered are considered to be officially unemployed even
though they are more accurately categorized as “not in labor force”.
15. INFLATION: A sustained rise in the
general price level of all goods and services at a constant or increasing rate.
This rise in the price level is estimated by an index created from the prices
of a sample of items called a market basket.
16. DISINFLATION: A sustained rise
in the general price level of all goods and services at a decreasing rate.
17. DEFLATION: A sustained fall in the
general price level of all goods and services at a constant, increasing or
decreasing rate.
18. NOMINAL INTEREST RATE: The interest
rate uncorrected for inflation.
19. EXPECTED REAL INTEREST RATE: The
nominal interest rate minus the expected rate of inflation.
20. INFLATION TAX: The depreciation in
the value of currency or demand deposits held by individuals caused by
inflation.
21. INDEXATION: The adjustment of wages
or any other monetary payment which is accomplished by increasing the value of
those payments by the inflation rate. The purchasing power of those monetary
payments should therefore remain constant.
22. GOVERNMENT DEFICITS: Occurs when
governments spend more than they receive in tax revenues. (NOTE: These
deficits are usually financed in one of three ways: an increase in future
taxes, an increase in borrowing from the bond markets, a direct increase in the
money supply produced by printing more money.)
*23. KEYNESIAN SHORT-RUN FISCAL POLICY:
Ideally, the government’s use of its budget to increase the stability of the
economy by changing tax revenues and/or government expenditures in the
following way:
(a)
During a recession, the government will attempt to reduce the duration of the
recession through expansionary fiscal policy: stimulation of private
expenditures directly (by increased government spending) or indirectly (by
decreased taxes) thereby increasing the deficit or reducing the
surplus.
(b)
During inflation, the government will attempt to reduce the duration of the
inflationary period through contractionary
fiscal policy: reduction of private expenditures directly (by reduced
government spending) or indirectly (by increased taxes) thereby reducing the
deficit or increasing the surplus.
24. LONG-RUN FISCAL POLICY: The ability
to manage the budget so that it is sustainable in the long-run. Sustainability
requires that there be no explicit (outright repudiation of legally promised
benefits or obligations) or implicit (by means of inflation) default on any
debt accumulated by the government.
25. LAW OF DEMAND FOR
LABOR: The quantity demanded of labor varies inversely with the wage,
other things held constant (such as the productivity of labor and the amount of
government regulation).
26. DEMAND PRICE OF LABOR: The maximum
wage an employer is willing to pay to a worker. This amount is based on the
employer’s estimate of how productive the worker will be in generating revenue
for the firm.
27. LAW OF SUPPLY OF
LABOR: The quantity supplied of labor varies directly with the wage,
other things held constant (such as population size).
28. SUPPLY PRICE OF LABOR: The lowest
wage a worker is willing to accept. This wage is determined by the opportunity
cost of a worker’s next best alternative. Those workers not receiving an offer
equal to the supply price in the current market will not accept employment
there.
29. EQUILIBRIUM: Where the quantity
supplied of labor is equal to the quantity demanded of labor, at a given wage.
30. DISEQUILIBRIUM: There are two
cases: (a) An Excess Supply occurs when the quantity supplied of labor
exceeds the quantity demanded of labor for some wage above the equilibrium
wage. The adjustment process causes wages to decrease until the Excess Supply
is equal to zero. (b) An Excess Demand occurs when the quantity demanded
of labor exceeds the quantity supplied of labor for some wage below the
equilibrium wage. The adjustment process causes wages to increase until the
Excess Demand is equal to zero.
31. MARGINAL BENEFITS OF JOB SEARCH:
The added benefits of searching for one more job. Such benefits occur in the
form of a higher wage.
32. MARGINAL COSTS OF JOB SEARCH: The
added costs of searching for one more job.
33. WAGE FLOOR: The minimum legal wage
that can be charged in a designated market. An effective wage floor must be
placed above the equilibrium wage. As a result, a wage floor suppresses the
adjustment process that would have eliminated an excess supply in its absence.
34. PRICE CEILING: The maximum legal
price that can be charged in a designated market. An effective price
ceiling must be placed below the equilibrium price. As a result, a price
ceiling suppresses the adjustment process that would have eliminated an excess
demand in its absence.
35. REPRESSED INFLATION: Occurs when
price ceilings are legally mandated in all markets (called price controls) in
order to prevent prices from rising. When price controls are finally repealed,
prices rise rapidly to their equilibrium level.
FIRST
EXAM---------------------------------------FIRST EXAM