Flashcards and Answers – Macroeconomics Definitions

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Natural Resources
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the lands, water, metals, minerals, animals and other gifts of nature that are available for producing goods and services.
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Scarcity
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the perpetual state of insufficiency of resources to satisfy people’s unlimited wants.
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Economics
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the study of how people work together to transform resources into goods and services to satisfy their most pressing wants, and how they distribute these goods and services among themselves
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Consumer sovereignty
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the ability of consumers to exercise complete control over what goods and services the economy produces (or doesn’t produce) by choosing what goods and services to buy (or not to buy).
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Economic model
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an abstraction of an economic reality. It can be expressed pictorially, graphically, algebraically, or in words.
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Ceteris paribus
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the Latin phrase meaning “everything else being equal”.
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Circular flow model
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a model of how the economy’s resources, money, goods and services flow between households and firms through resource and product markets.
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Household
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an economic unit of one or more persons, living under one roof, that has a source of income and uses it in whatever way it deems fit.
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Firm
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an economic unit that produces goods and services in the expectation of selling them to households, other firms or government.
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Microeconomics
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a subarea of economics that analyzes individuals as consumers and producers, and specific firms and industries. It focuses especially on the market behavior of firms and households.
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Macroeconomics
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A subarea of economics that analyzes the behavior of the economy as a whole.
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Positive economics
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a subset of economics that analyzes the way the economy actually operates.
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Normative economics
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a subset of economics founded on value judgments and leading to assertions of what ought to be.
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Econometrics
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the use of statistics to quantify and test economic models.
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Factor of production
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any resource used in a production process. Resources are grouped into labor, land, capital and entrepreneurship.
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Labor
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the physical and intellectual effort of people engaged in producing goods and services.
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Capital
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manufactured goods used to make and market other goods and services.
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Human capital
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the knowledge and skills acquired by labor, principally through education and training.
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Land
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a natural state resource such as real estate, grasses and forests, and metals and minerals.
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Entrepreneur
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a person who alone assumes the risks and uncertainties of a business
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Production possibilities
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the various combinations of good that can be produced in an economy when it uses its available resources and technology efficiently.
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Opportunity cost
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the quantity of other goods that must be given up to obtain a good.
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Vicious circle of poverty
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a country is poor because it does not produce capital goods. It does not produce capital goods because it is poor.
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Innovation
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an idea that eventually takes the form of new, applied technology
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Underemployed resources
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the less than full utilization of a resource’s productive capabilities.
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Economic efficiency
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the maximum possible production of goods and services generated by the fullest employment of the economy’s services.
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Labor specialization
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the division of labor into specialized activities that allow individuals to be more productive.
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Absolute advantage
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a country’s ability to produce a good using fewer resources than the country it trades with.
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Comparative advantage
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a country’s ability to produce a good at a lower opportunity cost than the country with which it trades.
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Change in quantity demanded
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a change in the quantity demanded of a good that is caused solely by a change in the price of that good.
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Law of demand
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the inverse relationship between price and quantity demanded of a good or service, ceteris paribus.
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Demand schedule
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a schedule showing the specific quantity of a good or service that people are willing and able to buy at different prices.
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Demand curve
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a curve that depicts the relationship between price and quantity demanded.
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Market demand
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the sum of all individual demands in a market.
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Supply schedule
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a schedule showing the specific quantity of a good or service that suppliers are willing and able to provide at different prices.
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Market day supply
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a market situation in which the quantity of a good supplied is fixed, regardless of price.
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Supply curve
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a curve that depicts the relationship between price and quantity supplied.
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Excess supply
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the difference, at a particular price, between quantity demanded, quantity supplied being the greater.
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Excess demand
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the difference, at a particular price, between quantity supplied, quantity demanded being the greater.
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Equilibrium price
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the price that equates quantity demanded to quantity supplied. If any disturbance from that price occurs, excess demand or excess supply emerges to drive price back to equilibrium.
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Short run
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the time interval during which suppliers are able to change the quantity of some but not all the resources they use to produce goods and services.
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Long run
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the time interval during which suppliers are able to change the quantity of all the resources they use to produce goods and services.
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Change in demand
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a change in quantity demanded of a good that is caused by factors other than change in the price of that good. These factors include changes in income, taste, prices of other goods, expectations about future prices, and population size.
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Normal good
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a good whose demand increases or decreases when people’s incomes increase or decrease.
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Substitute goods
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goods that can replace each other. When the price of one increases, the demand for the other increases.
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Complementary goods
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goods that are generally used together. When the price of one increases, the demand for the other decreases.
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Change in supply
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a change in quantity supplied of a good that is caused by factors other than a change in the price of that good. These factors include changes in technology, resource prices, prices of other goods, and the number of suppliers
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Recession
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a phase in the business cycle in which the decline in the economy’s real GDP persists for at least a half year. Usually has high unemployment.
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Depression
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severe recession
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Prosperity
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a phase in the business cycle marked by a relatively high level of real GDP, full employment, and inflation.
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Inflation
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an increase in the price level.
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Business cycle
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alternating periods of growth and decline in an economy’s GDP.
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Trough
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the bottom of a business cycle
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Recovery
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a phase in the business cycle, following a recession, in which real GDP increases and unemployment declines.
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Peak
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the top of a business cycle
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Downturn
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a phase in the business cycle in which real GDP declines, inflation moderates, and unemployment emerges.
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Gross domestic product
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total value of all final goods and services, measured in current market prices, produced in the economy during a year. Dependent on personal consumption expenditures, gross private domestic investment, government purchases, and net exports of goods and services.
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Nominal GDP
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GDP measured in terms of current market prices-that is, the price level at the time of measurement. (It is not adjusted for inflation).
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Real GDP
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GDP adjusted for changes in the price level
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Consumer price index
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a measure comparing the prices of consumer goods and services that a household typically purchases to the prices of those goods and services purchased in a base year.
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Base year
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the reference year with which prices in other years are compared in a price index.
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Price level
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a measure of prices in one year expressed in relation to prices in a base year.
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GDP deflator
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a measure comparing the prices of all goods and services produced in the economy during a given year to the prices of those goods and services purchased in a base year.
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Aggregate supply
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the total quantity of goods and services that firms in the economy are willing to supply at varying price levels.
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Aggregate demand
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the total quantity of goods and services demanded by households, firms, foreigners, and government at varying price levels. = C+I+G+(X-M)
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Demand pull inflation
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inflation caused primarily by an increase in aggregate demand
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Stagflation
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a period of stagnating real GDP, inflation and relatively high levels of unemployment.
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Cost push inflation
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inflation caused primarily by a decrease in aggregate supply.
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Circular flow of goods, services, and resources
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the movement of goods and services from firms to households and of resources from households to firms.
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Circular flow of money
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the movement of income in the form of resource payments from firms to households and of income in the form of revenue from households to firms.
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Expenditure approach
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a method of calculating GDP that adds all expenditures made for final goods and services by households, firms, and government.
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Final goods
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goods purchased for final use, not for resale.
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Intermediate goods
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goods used to produce other goods
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Value added
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the difference between the value of a good that a firm produces and the value of the goods the firm uses to produce it.
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Personal consumption expenditures
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all goods and services bought by households.
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Gross private domestic investment
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the purchase by firms of plant equipment and inventory goods
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Government purchases
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all goods and services bought by the government
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Net exports
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an economy’s exports to other economies, minus its imports from other countries.
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Durable goods
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goods expected to last at least a year.
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Nondurable goods
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goods expected to last less than a year.
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Services
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productive activities that are instantaneously consumed.
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Inventory investment
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stocks of finished goods and raw materials that firms keep in reserve to facilitate production and sales.
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Income approach
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a method of calculating GDP that adds all the incomes earned in the production of final goods and services.
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National income
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the sum of all payments made to resource owners for the use of their resources includes adding interest, corporate profit, rent compensation of employees and proprietors’ income.
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Gross national product
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the market value of all final goods and services in an economy produced by resources owned by people of that economy regardless of where the resources are located.
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Capital depreciation
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the value of existing capital stock used up in the process of producing goods and services.
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Personal income
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national income, plus income received but not earned, minus income earned but not received.
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Transfer payments
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income received but not earned. Examples is winning the lottery.
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Disposable personal income
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personal income minus direct taxes.
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Underground economy
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the unreported or illegal production of goods and services in the economy that is not counted in GDP.
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Consumption function
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the relationship between consumption and income.
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Absolute income hypothesis
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as national income increases, consumption spending increases, but by diminishing amounts. That is, as national income increases, the MPC decreases.
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Marginal propensity to consume (MPC)
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the ratio of the change in consumption spending to a given change in income.
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Relative income hypothesis
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as national income increases, consumption spending increases as well, always by the same amount. That is, as national income increases, MPC remains constant.
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Permanent income hypothesis
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a person’s consumption spending is related to his or her permanent income.
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Life cycle hypothesis
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typically, a person’s MPC is relatively high during young adulthood, decreases during the middle age years, and increases when the person is near or in retirement.
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Permanent income
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the regular income a person expects to earn annually.
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Transitory income
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the unexpected gain or loss of income that a person experiences. It is the difference between a person’s regular and actual income in any year.
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Autonomous consumption
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consumption spending that is independent of the level of income.
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Saving
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that part of national income not spent on consumption.
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Marginal propensity to save
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the chang in saving induced bya change in income.= change in savings/change in income
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Income curve
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a line, drawn at a 45 degree angle, showing all points at which the distance to horizontal axis equals the distance to the vertical axis.
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Intended investment
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investment spending that producers intend to undertake.
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Autonomous investment
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investment that is independent of the level of income. Determined by technology level, interest of rate,expectations of future economic growth, rate of capacity of utilization.
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Aggregate expenditure
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spending by consumers on consumption goods, businesses on investment goods, government and spending by foreigners on net exports. Same as GDP or AD
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Equilibrium level of national income
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I=S
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Unwanted inventories
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goods produced for consumption that remain unsold.
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Actual investment
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investment spending that producers actually make-that is, intended investment (investment spending that producers intend to do), plus or minus unintended changes in inventories.
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Aggregate expenditure curve
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a curve that shows the quantity of aggregate expenditures at different levels of national income or GDP.
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Income multiplier
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the multiple by which income changes as a result of a change in aggregate expenditure. 1/1-MPC or 1/MPS
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The paradox of thrift
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the more people try to save, the more income falls, leaving them with no more and perhaps with even less savings.
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Frictional unemployment
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relatively brief periods of unemployment caused by people deciding to voluntarily quit work in order to seek more attractive employment.
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Structural unemployment
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unemployment that results from fundamental technological changes in production, or from the substitution of new goods for customary ones.
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Cyclical unemployment
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unemployment associated with the downturn and recession phases of the business cycle..
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Discouraged worker
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unemployed people who give up looking for work after experiencing persistent rejection in their attempts to find work.
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Underemployed workers
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workers employed in jobs that do not utilize their productive talents or experience.
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Labor force
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people who are gainfully employed or actively seeking employment. Counts underemployed workers as working and discouraged workers as nothing.
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Natural rate of unemployment
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the rate of unemployment caused by frictional plus structural unemployment in the economy.
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Full employment
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an employment level at which the actual rate of employment in the economy is equal to the economy’s natural rate of unemployment. Cyclically unemployment is zero.
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Recessionary gap
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the amount by which aggregate expenditure falls short of the level needed to generate equilibrium national income at full employment without inflation.
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Inflationary gap
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the amount by which aggregate expenditure exceeds the aggregate expenditure level needed to generate equilibrium national income at full employment without inflation.
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Fiscal policy
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government spending and taxation policy to achieve macroeconomic goals of full employment without inflation.
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Balanced budget
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government spending equals tax revenues.
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Tax multiplier
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the multiple by which the equilibrium level of national income changes when a dollar change in taxes occurs. Dependent on marginal propensity to consume. (-MPC/1-MPC)
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Balanced budget multiplier
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the effect on the equilibrium level of national income of an equal change in government spending and taxes. Always equal to 1.
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Budget deficit
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government spending exceeds tax revenues. G>T
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Budget surplus
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tax revenues exceed government spending. G<T
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Countercyclical fiscal policy
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fiscal policy designed to moderate the severity of the business cycle.
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Accelerator
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the relationship between the level of investment and the change in the level of national income. = I/Y
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Barter
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the exchange of one good for another, without the use of money.
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Money
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Any commonly accepted good that acts as a medium of exchange, a measure of value, and a store of value.
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Fiat money
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paper money that is not backed by or convertible into any good.
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Currency
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coins and paper money
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Liquidity
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the degree to which an asset can easily be exchanged for money
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Money supply
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typically, M1 money, includes currency, demand deposits, and traveler’s checks used in transactions
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M1 money
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the most immediate form of money. It includes currency, demand deposits, and traveler’s checks.
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M2 money
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M1 money plus less immediate forms of money, such as savings accounts, money market mutual fund accounts, money market deposit accounts, repurchase agreements, and small denomination time deposits.
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Velocity of money
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the average number of times per year each dollar is used to transact an exchange.
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Equation of exchange
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MV=PQ. The quantity of money times its velocity equals the quantity of goods and services produced times their prices.
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Quantity theory of money
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P=MV/Q. The equation specifying the direct relationship between the money supply and prices.
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Transactions of demand for money
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the quantity of money demanded by households and businesses to transact their buying and selling of goods and services.
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Fractional reserve system
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a banking system that provides people immediate access to their deposits but allows banks to hold only a fraction of those deposits in reserve.
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Balance sheet
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the bank’s statement of liabilities (what it owes) and assets (what it owns).
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Legal reserve requirement
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the percentage of demand deposits banks and other financial intermediaries are required to keep in cash reserves.
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Financial intermediaries
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firms that accept deposits from savers and use those deposits to make loans to borrowers.
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Potential money multiplier
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the increase in the money supply that is potentially generated by a change in demand deposits. 1/LRR
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Excess reserves
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the quantity of reserves held by a bank in excess of the legally required reserve.
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Federal Deposit Insurance Corporation
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A government insurance agency that provides depositors in FDIC-participating banks 100 percent coverage on their first $100,000 of deposits.
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Bank note
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a promissory note, issued by a bank, pledging to redeem the note for a specific amount of gold or silver. The terms of redemption are specified on the note. government
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State chartered bank
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a commercial bank that receives its charter or license to function from a state government and is subject to the laws of that state.
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Nationally chartered bank
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a commercial bank that receives its charter from the comptroller of the currency and is subject to federal law as well as the laws of the state in which it operates.
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Federal Reserve System
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the central bank of the United States
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Federal Open Market Committee
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the Fed’s principal decision making body, charged with executing the Fed’s open market operations.
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Countercyclical monetary policy
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policy directives used by the Fed to moderate swings in the business cycle. Their tools include changing the legal reserve requirement, changing the discount rate or buying/selling bonds on the open market.
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Reserve requirement
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the minimum amount of reserves the Fed requires a bank to hold, based on a percentage of the bank’s total deposit liabilities.
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Open market operations
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the buying and selling of government bonds by the Federal Open Market Committee.
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Federal funds market
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the market in which banks lend and borrow reserves from each other for very short periods of time, usually overnight.
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Federal funds rate
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the interest rate on loans made by banks in the federal funds market.
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Margin requirement
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the maximum percentage of the cost of a stock that can be borrowed from a bank or any other financial institution, with the stock offered as collateral.
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Public good
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a good whose benefits are not diminished even when additional people consume it and whose benefits cannot be withheld from anyone. An example is a streetlight.
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Merit good
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a good that market demand and supply do not produce enough of, in some people’s opinion. Examples include education and health care.
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Welfare
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government-provided assistance-cash payments and goods and services-to the poor, the elderly and the disabled. Eligibility is based principally on income and family size.
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Food stamp program
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an aid program that provides low-income people with stamps that can be redeemed for food and related items.
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Medicaid
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a health care program administered through Social Security that is applicable to low income and disable people.
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Social Security
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a social insurance program that provides benefits, subject to eligibility, to the elderly, disabled and their dependents.
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Unemployment insurance
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a program of income support for eligible workers who are temporarily unemployed.
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Medicare
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a health care program administered through Social Security that is applicable to everyone over the age of 65.
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Poll tax
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a tax of a specific absolute sum levied on every person or every household. Normally occurs when there is not a lot of date about a population’s income.
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Regressive income tax
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a tax whose impact varies inversely with the income of the person taxed. Poor people have a higher percentage of their income taxed than do rich people.
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Proportional income tax
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a tax that is a fixed percentage of income, regardless of the level of income. Also known as a flat rate tax.
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Progressive income tax
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a tax whose rate varies directly with the income of the person taxed. Rich people pay a higher tax rate-a larger percentage of their income is taxed-than do poor people.
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Corporate income tax
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a tax levied on a corporation’s income before dividends are distributed to stockholders.
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Property tax
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a tax levied on the value of physical assets such as land, or financial assets such as stock and bonds.
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Unit tax
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a fixed tax, in the form of cents or dollars per unit, levied on a good or service.
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Sales tax
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a tax levied in the form of a specific percentage of the value of the good or service.
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Customs duty
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a sales tax applied to a foreign good or service.
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Excise tax
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any tax levied on a good or service, such as a unit tax, a sales tax or a customs duty.
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Public debt
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the total value of government securities-treasury bills, notes, and bonds-held by individuals, businesses, other government agencies and the Fed.
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Savings bond
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a nonmarketable Treasury bond that is the most common held form of public debt.
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External debt
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public debt held by foreigners.
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Economic growth
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an increase in real GDP, typically expressed as an annual rate of real GDP growth
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Labor productivity
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the quantity of GDP produced per worker, typically measure in quantity of GDP per hour of labor.
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Capital deepening
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a rise in the ratio of capital to labor.
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Labor skills
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the proficiency to perform actual tasks and technical functions required in specific occupational fields. These skills reflect the laborer’s natural ability, experience on the job, and education.
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Efficiency gains
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the increase in productivity associated with adoption of new technology and the reorganization of the workplace to accommodate the technology.
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Entrepreneurship
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a person who alone assumes the risks and uncertainties of business.
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Capital labor ratio
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the ratio of capital to labor, reflecting the quantity of capital used by each laborer in production.
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Capital output ratio
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the ratio of capital stock to GDP.
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Less developed countries
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the economies of Asia, Africa, and Latin America.
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Infrastructure
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the basic institutions and public facilities upon which an economy’s development depends.
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Big push
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the development strategy that relies on an integrated network of government sponsored and financed investments introduced into the economy all at once.
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Forward linkages
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investments in one industry that create opportunities for profitable investments in other industries, using the goods produced in the first as inputs. Example: Beverage companies need bottles.
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Backward linkages
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investments in one industry that create demands for inputs, including investment in other industries to produce those inputs. An example is need plastic to make a bottle.
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Free trade
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international trade that is not encumbered by protectionist government policies such as tariffs and quotas.
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International specialization
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the use of a country’s resources to produce specific goods and services, allowing other countries to focus on the production of other goods and services.
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Absolute advantage
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a country’s ability to produce a good using fewer resources than the country it trades with.
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Comparative advantage
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a country’s ability to produce a good at a lower opportunity cost than the country with which it trades.
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Imports
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goods and services bought by people in one country that are produced in other countries.
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Exports
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goods and services produced by people in one country that are sold in other countries.
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Terms of trade
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the amount of a good or service (export) that must be given up to buy a unit of another good or service (import). A country’s _____ are measured by the ratio of the country’s export prices to it import prices.
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Dumping
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exporting a good or service at a price below its cost of production
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Tariff
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a tax on an imported good
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Quota
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a limit on the quantity of a specific good that can be imported.
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Reciprocity
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an agreement between countries in which trading privileges granted by one to the others are the same as those granted to it by the others.
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General Agreement on Tariffs and Trade
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a trade agreement to negotiate reductions in tariffs and other trade barriers and to provide equal and non-discriminating treatment among members of the agreement. Around 100 countries are members
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World Trade Organization
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the successor to GATT. The only global international organization dealing with the rules of trade between nations. It promotes free trade. Once negotiated and signed by member nations, agreements are ratified by member nations’ parliaments.
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Customs union
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a set of countries that agree to free trade among themselves and a common trade policy with all the other countries. Example: European Union.
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European Economic Community
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a customs union consisting of France, Italy, Belgium, Holland, Luxembourg, Germany, Britain, Ireland, Spain, Denmark, Greece, Portugal, Iceland, Finland, Sweden, and Austria.
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European Union
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an organization of European nations committed to economic and political integration without abandoning individual national sovereignty.
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Free trade area
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a set of countries that agree to free trade among themselves but are free to pursue independent trade policies with other countries.
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North American Free Trade Agreement
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a free trade area consisting of Canada, the United States and Mexico.

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