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75
Accounting
Kindergarten
02/17/2009

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Term
real gross domestic product (GDP)
Definition
the market value of final goods and services produced in an economy, stated in the prices of a given year
Term
business cycle
Definition
the upward or downward movement of economic activity, or real GDP, that occurs around the growth trend
Term
Keynesians
Definition
in favor of activist government policies because they believe input prices are sticky and when the economy is in a recession government intervention is necessary to shift the AD curve back up
Term
Classicals
Definition
favor laissez-faire or nonactivist government policies - prices flexible in both directions
Term
recession
Definition
a decliine in real output that persists for more than two consecutive quarters of a year
Term
downturn
Definition
the phenomenon of economic activity starting to fall from a peak
Term
boom
Definition
very high peak, representing a big jump in output
Term
peak
Definition
the top of a business cycle
Term
trough
Definition
the bottom of a business cycle
Term
depression
Definition
a large recession (>12% unemployment for one year)
Term
expansion
Definition
an upturn that lasts at least two consecutive quarters of a year
Term
unemployment rate
Definition
the percentage of people in the economy who are willing and able to work but who are not working
Term
cyclical unemployment
Definition
unemployment resulting from fluctuations in economic activity (affected by retractions/recessions)
Term
structural unemployment
Definition
natural unemployment caused by the institutional structure of an economy or by economic restructuring making some skills obsolete - "creative destruction"
Term
frictional unemployment
Definition
natural unemployment caused by people entering the job market and people quitting a job just long enough to look for and find another one - increases because of regulations (France) decreases because of information (monster.com)
Term
natural rate of unemployment (u* or target rate of unemployment)
Definition
the lowest sustainable rate of unemployment that policy makers believe is achievable given existing demographics and the economy's institutional structure - no cyclical unemployment exists, only structural and frictional
Term
labor force
Definition
those people in an economy who are willing and able to work
Term
labor force participation rate
Definition
measures the labor force as a percentage of the total population at least 16 years old
Term
employment-population ratio
Definition
the number of people who are working as a percentage of people available to work
Term
potential output
Definition
the output that would materialize at the target rate of unemployment and the target rate of capacity utilization
Term
okun's rule of thumb
Definition
a 1 percentage point change in the unemployment rate will be associated with a 2 percent change in output in the opposite direction
Term
inflation
Definition
a CONTINUAL rise in the price level
Term
deflation
Definition
a CONTINUAL fall in the price level
Term
price index
Definition
a number that summarizes what happens to a weighted composite of prices of a selection of goods (often called a market basket of goods) over time
Term
GDP deflator
Definition
an index of the price level of aggregate output, or the average price of the components in total output (or GDP) relative to a base year
Term
consumer price index (CPI)
Definition
measures the prices of a fixed basket of consumer goods, weighted according to each component's share of an average consumer's expenditures
Term
personal consumption expenditure (PCE) deflator
Definition
measure of prices of goods that consumers buy that allows yearly changes in the basket of goods that reflect actual consumer purchasing habits
Term
producer price index (PPI)
Definition
index of prices that measures average change in the selling prices RECEIVED by domestic producers of goods and services over time
Term
real output
Definition
the total amount of goods and services produced, adjusted for price-level changes
Term
nominal output
Definition
total amount of goods and services produced measured at current prices
Term
formula to translate nominal output to real output
Definition
nominal output/price index x 100
Term
hyperinflation
Definition
when inflation hits triple digits - 100% or more per year
Term
gross domestic product (GDP)
Definition
the total market value of all final goods and services produced in an economy in a one-year period
Term
the four expenditure categories
Definition
1) consumption
2) investment
3) government spending
4) net exports
Term
consumption
Definition
spending by households on goods and services (food, shampoo, televisions, furniture, services of doctors and lawyers, etc.)
Term
investment
Definition
spending for the purpose of additional production (business spending on factories and equipment for production, the change in business inventories, purchases of factories, tractors, computers, etc...NOT STOCKS AND BONDS, THEY ARE CONSIDERED SAVING)
Term
government spending
Definition
goods and services that government buys (TRANSFER PAYMENTS NOT INCLUDED)
Term
transfer payments
Definition
payments to individuals that do not involve production by those individuals (Social Security, unemployment insurance, etc.)
Term
net exports
Definition
spending on goods and services produced in the US that foreigners buy (exports) minus goods and services produced abroad that US citizens buy (imports)
Term
wealth accounts
Definition
a balance sheet of an economy's stock of assets and liabilities
Term
final output
Definition
goods and services purchased for their final use
Term
intermediate products
Definition
products used as input in the production of some other product
Term
value added
Definition
the increase in value that a firm contributes to a product or service
Term
depreciation
Definition
the decrease in an asset's value
Term
net domestic product (NDP)
Definition
GDP minus depreciation - accounts for production used to replace worn-out plant and equipment that is not available for purchase for consumption, investment, or government spending
Term
net investment
Definition
gross investment minus depreciation
Term
gross national product (GNP)
Definition
the aggregate final output of citizens and businesses of an economy in a one-year period
Term
net foreign factor income
Definition
the income from foreign domestic factor sources minus foreign factor income earned domestically - we must add the foreign income of our citizens and subtract the income of residents who are not citizens to calculate GNP
Term
4 sources of aggregate income
Definition
1) compensation of employees
2) rents (income from property received from households, not firms)
3) interest
4) profits
Term
first "rotunda point"
Definition
voluntary trade helps both sides
Term
factors that influence demand
Definition
1) price (inverse - causes a change in quantity demanded)
2) substitues price (direct)
3) complements (inverse)
4) consumer income (normal vs. inferior goods)
5) sales taxes (inverse)
6) consumer preferences (depends)
Term
factors that influence supply
Definition
1) price (direct - change in quantity supplied)
2) resource prices (inverse)
3) technology (direct)
4) regulations (inverse)
5) weather (natural disasters)
Term
3 effects of high GDP
Definition
1) higher literacy rates
2) lower infant mortality
3) more women's rights
Term
3 economic conditions measured by GDP
Definition
1) living standards
2) economic growth
3) business cycles
Term
GDP growth rate of the last 50 years
Definition
3.3%
Term
GDP growth rate of the last 10 years
Definition
2.9%
Term
long run unembloyment average (last 50 years)
Definition
5.9%
Term
unemployment rate from December 2008
Definition
7.2%
Term
full employment output (Y*)
Definition
the output level when unemployment is equal to the natural rate (u=u*)
Term
current seasonally adjusted unemployment rate for 2009
Definition
7.6%
Term
second "rotunda point"
Definition
inflation is a monetary phenomenon
Term
signal extraction problem
Definition
caused by inflation, leads firms to be unsure whether an increase in price is due to an increase in demand or an increase in inflation and whether or not they should expand their output in response
Term
money illusion
Definition
when people irrationally interpret nominal changes as real changes
Term
future price level uncertainty
Definition
the value of future dollars is affected by inflation, making wage contracts and loan agreements difficult and riskier in the long-term (you don't know how the interest rate will hold up in response to normal inflation in the future)
Term
basis of the loanable funds market
Definition
every dollar borrowed requires a dollar saved
Term
3 effects on supply of loanable funds (savings)
Definition
1) interest rate - higher prices/rates mean a higher quantity supplied
2) time preference - goods and services are more valuable the sooner they are delivered
3) consumption smoothing - people like smooth consumption patterns (we save in the middle of our life when income is high and use our savings when income fails at retirement or in emergencies)
Term
3 effects on the demand for loanable funds (investment)
Definition
1) price
2) capital productivity - if capital tools are more productive, firms are willing to pay more for loanable funds
3) consumption smoothing
Term
examples of direct finance
Definition
stocks and bonds
Term
examples of indirect finance
Definition
banks
Term
3 key pieces of information on a bond
Definition
1) borrower
2) date of maturity
3) value at maturity (face value)
Term
default risks
Definition
the risk that the borrower or seller of a bond will default and not be able to pay back the bond (rated by Moody's, S&P, and Fitch into AAA, BBB, BB....D)
Term
jumk bonds
Definition
bonds with a very high default risk (and therefore higher interest rate) ex: Ford
Term
relationship between bond price and interest rate
Definition
move oppositely (one indicates the other and vice versa)
Term
securitization
Definition
bundling financial assets together to form a new combined security (provides diversification and marketability)
Term
subprime mortgage
Definition
a high risk home loan in which teh home buyer (low-income) is more likely to default - FNMA and FHLMC
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