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Term
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| The situation in which unlimited wants exceed the limited resources available to fulfill those wants. |
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| The study of the choices people make to attain their goals, given their scarce resources. |
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| A simplified version of reality used to analyze real-world economic situations. |
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| A group of buyers and sellers of a good or service and the institution or arrangement by which they come together to trade. |
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| 3 Fundamental Assumptions |
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1) people are rational
2) people respond to economic incentives
3) optimal decisions are made at the margin |
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| What does it mean that "optimal decisions are made at the margin?" |
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| A person makes economic decisions by comparing the marginal costs and marginal benefits. |
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| You choose to do something or you don't (2 choices). |
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| Is doing an activity for longer (such as studying) worth what you give up (more sleep)? |
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| The idea that because of scarcity, producing more of one good or service means producing less of another good or service. |
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| The highest-valued alternative that must be given up to engage in an activity. |
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| Society gets the most that it can from its scarce resources. |
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| The benefits of resources produced are distributed fairly among the members of society. |
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| Centrally planned economy |
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| An economy in which the government decides how economic resources will be allocated. |
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| An economy in which the decisions of households and firms interacting in markets allocate economic resources. |
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| An economy in which most economic decisions result from the interaction of buyers and sellers in markets, but in which the government plays a role in the allocation of resources. |
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| Which type of economy (centrally planned, market, mixed) is most common and found in the USA? |
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Definition
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| Steps to developing an economic model (5) |
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Definition
1) What assumptions are being made?
2) Make a testable hypothesis
3) Use economic data to test it
4) Revise if needed
5) Retain the model for future questions that are similar |
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| Analysis concerned with what is. (Facts) |
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| What ought to be. (Opinions) |
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| The study of how individual households and firms make decisions. |
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| Stages of the business cycle (2) |
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| Total production and total employment are increasing for at least 2 consecutive quarters. |
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| Total production and total employment are decreasing for at least 2 consecutive quarters. |
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| Time between the beginning of a recession until the beginning of the next recession. |
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| Main macroeconomic variables effecting the economy (6) |
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Definition
1) Gross Domestic Product
2) Gross National Product
3) Net National Product
4) National Income
5) Personal Income
6) Disposable Personal Income |
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| Gross domestic product (GDP) |
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Definition
| The total market value of all final goods and services produced within a country in a given period of time. |
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| Goods used in the production of other goods; not a final product. |
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| Methods of calculating GDP (3) |
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Definition
1) Product Approach
2) Expenditure Approach
3) Income Approach |
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| Product approach to calculating GDP |
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Definition
| Adding the market value of all final goods and services produced or traded in a year. |
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| Expenditure approach to calculating GDP |
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Definition
| Adding up all the money spent on al final goods and services produced and traded in a year. |
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| Income approach to calculating GDP |
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Definition
| Adding the income received by producers in a year. |
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| The spending by households on goods and services (domestically and abroad) with the exception of purchase of new housing. |
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| The spending on capital equipment, inventory, and structures produced domestically and abroad. |
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| The spending on goods and services by local, state, and federal governments produced domestically and abroad. |
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| Goods and services that go unreported in order to avoid paying taxes, or because they're illegal. |
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| Gross National Product (GNP) |
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| The value of output produced by a country's residents only, even if production takes place abroad. |
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Definition
GDP+ (value of output produced by a country's residents
only - value of output produced by non US citizens within US borders). |
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| Net National Product (NNP) |
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Definition
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Definition
| Consumption of fixed capital and the subsequent loss of value of the capital due to wear and tear. |
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| Found by adding all the components of GDP calculated using the income approach. |
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| NNP - statistical discrepancy |
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Definition
| Income received by households only. |
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| Disposable personal income |
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Definition
| Personal income with taxes subtracted. |
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Definition
| Values the production of goods and services at current prices and current production. |
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Definition
| Values the production of goods and services at constant prices and current production. |
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| A measure of the price level calculated as the ratio of the nominal GDP to real GDP (and multiplied by 100 to get a percentage). |
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Definition
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| Consumer Price Index (CPI) |
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Definition
| Measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. |
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Term
| The CPI is calculated by _____________? |
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Definition
| The Bureau of Labor Statistics (BLS). |
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Definition
| The growth rate of the CPI. A percentage change in the price level. |
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| What is the difference between the GDP deflator and the CPI? |
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Definition
| The GDP deflator reflects the prices of all goods and services produced domestically, while the CPI reflects the prices of what is bought by consumers. |
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Definition
| Errors that occur because of the random nature of selection. |
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Definition
| Consistently making the same error. |
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Definition
| Consumers respond to price changes by purchasing cheaper substitutes. This will not show up in the CPI, however, causing inflation rates to be overstated. |
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Definition
| Some products experience small improvements in quality over time. It is difficult to distinguish changes in quality versus pure price increases. |
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Definition
| New products are not automatically introduced into the market basket. |
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Definition
| The BLS does not know from which store consumers bought their items, and price may vary slightly between them. |
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Definition
| The resources wasted when inflation encourages people to reduce their money holdings. |
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Definition
| Inflation rates that rise above 50%. |
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Definition
| The costs of adjusting prices. |
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| Relative-price variability |
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Definition
| The relative price of a specific good is a comparison of its price to the prices of other goods and services, and inflation distorts this. |
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Term
| Misallocation of resources |
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Definition
| Distorted inflation rates cause markets to be unable to allocate resources to their best use. |
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| Inflation-induced tax distortion |
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Definition
| Inflation exaggerates the size of capital gains and increases the tax burden. |
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| Arbitrary redistribution of wealth |
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Definition
| Salaries lose purchasing power while employers gain at their workers' expense. |
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Term
| Who measures unemployment statistics? |
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Definition
| The Bureau of Labor Statistics (BLS) |
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| What are the 3 categories of employment status recognized by the BLS? |
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Definition
| Employed, unemployed, not in the labor force. |
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| What is the survey that analyzes employment? |
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Definition
| The Current Population Survey (CPS). |
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Term
| At what age does the CPS consider a person to be an adult? |
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Definition
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Term
| What qualifications does a person have to meet in order to be considered "employed?" |
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Definition
| If he/she has spent most of the previous week working at a paid job. |
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Term
| What characteristics define someone who's unemployed? |
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Definition
| If he/she is on a temporary layoff, has looked for a job in the past 4 weeks, or is waiting for the start date of a new job. |
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Term
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Definition
employed + unemployed
(does not include people who fit under the category of not in the work force) |
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Term
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Definition
| (# unemployed/ labor force) x 100 |
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Term
| Labor force participation rate = |
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Definition
| (# in labor force / adult population) x 100 |
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Term
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Definition
| People who would like to work but have given up looking for jobs after an unsuccessful search. |
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| Under which employment status do discouraged workers fall? |
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Definition
| Not part of the labor force. |
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Term
| Under which employment category do part-time workers fall? |
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Definition
| Employed, even though some may be looking for full-time work. |
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Term
| What are two factors that cause the unemployment rate to be overstated? |
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Definition
1) Some people claim to be unemployed in order to receive benefits
2) "Under-the-table" work such as drug sales. |
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Term
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Definition
| Short term. Refers to year-to-year fluctuations in unemployment around its natural rate. |
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Term
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Definition
| Short term. Refers to the unemployment that results from the time that it takes to match workers with jobs that are suitable for them. |
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Term
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Definition
| Long term. Arises from the persistent mismatch between the skills of workers and job requirements. |
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Term
| Natural rate of unemployment |
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Definition
| Unemployment that does not go away on its own, even in the long run. |
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Term
| Natural rate of unemployment = |
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Definition
| Frictional unemployment + structural unemployment |
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Term
| In what way does unemployment insurance increase the amount of unemployment? |
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Definition
| It reduces job search efforts. |
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| What is the benefit of unemployment insurance? |
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Definition
| It may improve chances of workers being matched with jobs that best suit their skills. |
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Term
| How can minimum-wage laws increase unemployment? |
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Definition
| When it is set above the level that balances supply and demand, it creates unemployment. |
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Term
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Definition
| A worker association that bargains with employers over wages and working conditions. |
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Definition
| The process by which unions and firms agree on terms of employment. |
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| What happens if both parties cannot come to an agreement during collective bargaining? |
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Definition
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Definition
| When the union organizes a withdrawal of labor from the firm. |
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Definition
| Above-equilibrium wages paid voluntarily by firms in order to increase worker productivity. |
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