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Macroeconomics

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The study of economy-wide aggregate (total) behaviors.

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Macroeconomic objectives

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1) Low unemployment or full employment (NRU) 2) Price level stability 3) Economic growth also... 4) Economics development 5) Income Inequality

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Circular Flow of Income

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a model that describes how economic activity occurs between the different groups in an economy. Saving, taxation and spending on imports represent 'leakages' from the circular flow. Investment, government spending and export revenue represent 'injections' into the circular flow.

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Aggregate Demand

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total demand for goods and services in an economy (C+I+G+Xn)

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Components of Consumption (5)

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Level of national income (consumption, savings, taxes, imports) Wealth Real interest rates Household dept Consumer Confidence and expectations of future income

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Sticky wages

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wages that can not be reduced when the AD of labour decreases (like a price floor on wages)

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Components of Investment (2)

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Interest rates Business Confidence and expectations (future prices, technology, business taxes, inventories, the degree of excess capacity)

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Components of Net Exports (3)

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Incomes abroad Taste and preferences of consumers Exchange rates

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Aggregate Supply

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total supply of goods and services in an economy.

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Short run aggregate supply curve

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a macroeconomic curve that shows the relationship between the price level and the quantity of real output (real GDP) when resource prices (especially wages) do not change

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Consumption

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household spending on goods and services (both durable and non-durable goods)

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Investment

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business spending on capital goods

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Saving

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income that is not spent, setting aside income or money for future use

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Imports

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goods and services that foreign countries buy from the domestic country

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Exports

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goods and services that are produced domestically and sold to foreign countries

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Marginal propensity to... (MPC, MPS, MPT, MPM)

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they measure the proportion of a change in household income that is ... (used to consume domestic output, saved by households, paid in taxes and used to purchase imports)

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Gross Domestic Product

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the total market value of all final goods and services produced within an economy over a period of time (usually a year) (and in dollars)

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Real GDP (or real output)

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the total value of all goods and services produced in a country of a country's national income over a given time period (adjusted for inflation and measure in dollars)

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Expenditure approach

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a method used to calculate GDP by summing total expenditures on final goods and services OR it is a method of calculating GDP based on summing consumption, investment, government expenditure and net exports (ie C + I + G + X - M).

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Income approach

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a method used to calculate GDP by summing up all incomes received by factors of production

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Output approach

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adds up all production values of final output from firms

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Gross National Product / Income

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the market value of all goods and services produced by domestically-owned factors of production over a specific time period, usually one year (it attempts to measure the flow of income based on actual ownership of the factors of production)

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Real vs Nominal GDP

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real GDP is GDP adjusted for inflation and nominal GDP is measured in current dollars

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Green GDP

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a measure of the total output of an economy, taking into account the environmental consequences (externalities) involved in the production of that output

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Final vs. Intermediate goods

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intermediate are goods which are produced by a firm and used in the production process whereas final goods are the ones used for final consumption

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Double counting

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including the same good or service more than once in your valuation of output

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Investment

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business spending on capital goods

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Capital Formation

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additions to the stock of capital over a period of time

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Capital stock

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a nation's capital stock is the value of all capital goods in the country (at a point in time)

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Purchasing Power Parity (PPP)

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the theory that in the long run identical goods and services sold in different countries will cost the same (for GDP measures it looks at the buying power in a country: the amount a person can buy with their income at local prices)

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Interest Rate

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the price of money (borrowing or loaning), expressed as a percentage (often called the opportunity cost of spending money)

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National Income

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the total value of all income in a nation (Consumption + Government Spending + Investment + (Exports - Imports))

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Fiscal Policy

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a policy that uses changes in government spending (G) and/or taxation (T) to affect aggregate demand

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Monetary Policy

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a demand-side policy, where the central bank uses changes in the money supply or interest rates to affect AD

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Expansionary Fiscal Policy

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an increase in government spending or a reduction in taxes

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Keynesian Economics

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economic theory based on the principles of John Maynard Keynes stating that government spending should increase during business slumps and be curbed during booms.

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Neo-Classical Economics

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an approach to economics based on supply and demand which depends on economic agents operating rationally based on available info

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Business Cycle

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economy-wide fluctuations in production or economic activity over a period of months or years, consisting of recession and recovery and growth and decline

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Recession

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state of economy declining - a decrease in real GDP over two consecutive quarters

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Recovery

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state of economy rising - an increase in real GDP, usually accompanied by a rise in employment

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Expansion

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when real GDP expands beyond recovery

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Depression

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a severe reduction in an economy's total output, accompanied by high unemployment lasting several years

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Unemployment

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people who are actively looking for a job

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Unemployment rate

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the number of workers without a job, who are willing and able to work, expressed as a percentage of the workforce

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Labor force

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all non-institutionalized civilian individuals age 16 or above, who are either working or actively looking for work

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Real wages

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wages are the payment for labour/working and that real wages are the value after they have been adjusted for inflation (thus real wages refers to the "purchasing power" of wages)

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Autonomous consumption

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the level of consumption which does not depend on income (the argument is that even with zero income you still need to buy enough food to eat, through borrowing or running down savings)

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Frictional Unemployment

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Unemployment between jobs.

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Seasonal Unemployment

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Unemployment due to seasonal circumstances.

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Structural Unemployment

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unemployment that exists as a result of rigidities in the labour market (such as a fall in the demand for a particular type of labour)

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Cyclical/Disequilibrium/Demand deficient Unemployment

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unemployment caused by variations in the business cycle (recession - decrease in GDP)

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Voluntary unemployment

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people who are unwilling to work at the market wage rate

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Natural Rate of Unemployment (NRU)

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Frictional + Structural + Seasonal unemployment (5-6% for industrialised countries) - it is the level of unemployment that prevails when a nation is producing at it's full-employment level of output

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Discouraged workers

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workers who have dropped out of the labor force because of lack of success in finding a job (not included in unemployment rate)

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Underemployment

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working below productive capacity (part time instead of full time)

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Disguised unemployment

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workers who have a job but are redundant or non-productive

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Full employment

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the level of employment where there is no cyclical unemployment (100% employment - NRU = 94-95% for industrialised countries)

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Crowding Out

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a decrease in AD/consumption/investment that results from government's increased borrowing (which drives up interest rates)

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Multiplier

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the amount by which an injection is multiplied to result in a change in GDP that is higher than the injection

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Philip's Curve

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curve showing a short-run trade-off between unemployment and inflation; only applies if there is a change in AD; in the long run, leads to an increase in inflation

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Wealth

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the total value of the accumulated assets owned, minus its liabilities. The wealthier a nation's households, the greater the level of consumption

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Loanable funds market

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a hypothetical market that shows the relationship between the real interest rate in a country and the supply and demand for money from households and firms for private investment

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Depreciation

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a decrease in the value (price) of a currency (in terms of a foreign currency or in a floating exchange rate system)

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Budget surplus

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when government (tax and other) income (T) exceeds government expenditures (G)

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Budget deficit

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when government expenditures (G) exceed government (tax) revenues (T)

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Business confidence

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the degree of optimism or pessimism characterizing he businesses which affects their decisions on investment spending.

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Business cycle

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the fluctuations of real GDP in a given time period

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Capital

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produced means of production (tools, equipment, machines, etc.)

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Stimulus measures

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used when economy in a recession - increase in Government spending and decreasing direct Taxes such as: Expansionary Fiscal Policy

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Austerity policies

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used when economy is concerned with annual budget deficit and dept - decrease Government spending and increase Taxes

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Supply-side policies

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policies designed to increase the aggregate supply of an economy (shift the AS curve to the right)

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Durable goods

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goods that will last longer than a year (cars, house, etc.)

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Double-dip or Triple-dip Recession

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when it looks like an economy is recovering but only recovers for a short period and turns to a recession again

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Downward spiral (Keynesian)

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once the economy goes down it will keep going down

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Dept

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accumulation of deficit (imbalance in money intake)

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Indebtness

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the amount of money that a country owes to other countries and/or international institutions

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Default

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when you cannot pay back bonds

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Inventories

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Inventories are goods that have been produced but have not been sold

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CPI

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Consumer Price Index measures the prices of goods and services in a particular nation over time, and is widely used by governments to measure changes in the price level of products typically bought by households

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Inflation

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Persistent increase in the average price level of goods and services in a nation, measured by consumer price index.

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Deflation

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a sustained decrease in the average price level of a nation's output

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Disinflation

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a decrease (or reduction) in the rate of inflation (at which avg. price level is rising)

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Inflation rate

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the percentage change in a price index between one period of time and another. It measures the change in the average price level of goods and services in nations over time.

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Demand-pull inflation

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an increase in price levels for goods and services due to the increased overall demand for a nation's output (when consumption, investment, government spending and net exports rise without corresponding to an increase in AS)

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Cost-push inflation

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an increase in price levels for goods and services due to an increase in the cost of production (faced by producers) which shifts the SRAS curve to the left

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Stagflation

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either zero or negative economic growth (cost-push inflation is often accompanied by stagflation)

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Negative supply shock

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an unexpected decrease in AS of a nation

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The inflationary spiral

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the situation in which demand-pull inflation leads to cost-push inflation (a major threat to the economy)

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Hyperinflation

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a very high rate of inflation (basically when prices increase on a daily basis)

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Price level (index)

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a measure of the average level of prices of goods and service in an economy

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Monetarism

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the school of economic thought (promoted by Milton Friedman), which argues that a change in the supply of money only causes inflation or deflation - but not a change in the level of employment in a nation. (supports the view of LRPC at NRU, and LRAS of neo-classical views)

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Profit push

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businesses are greedy and raise prices to gain profits

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Wage push

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people want to raise their wages

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Efficiency

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getting the most out of a given input

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Equality

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smaller disparities among a nation's households in their maintainable living standards and in the distribution of income and wealth

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Equity

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refers to the fairness in economics, and requires a level in which all individuals of a society have a fair shot at achieving economic success

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Relative poverty

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the condition experience by people in a country whose incomes are considerably lower than the higher income group in the same country

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Absolute poverty

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the condition experienced by people in a country whose incomes are too low to be able to afford even the most basic necessities for a healthy and safe existence

IB HL Economics – Paper 1 Definitions: Macroeconomics

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