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Microeconomics
the study of how individuals and how firms make decisions and how they interact in markets
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Macroeconomics
the study of economy-wide phenomena, incl. inflation, unemployment, and economic growth
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GDP
Gross domestic product: measures total income of a nation, the market value of all final goods and services produced within a country in a given period of time
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Y = C + I + G + NX
- Y=GDP
- C=consumption
- I=investment
- G=government purchases
- NX=net exports
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Consumption
spending by households on goods and services, w/ exception of purchases of new housing
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Investment
spending in capital-equipment, inventories, and structures including household spending on new housing
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Government Purchases
spending on goods and services by local, territorial, provincial, and federal govts
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Net exports
the value of a nation's exports minus the value of its imports, aka trade balance
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GDP deflator
a measure of the price level, ratio of nominal GDP to real GDP times 100
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CPI
Consumer price index: the overall measure of the cost of the goods and services bought by a typical consumer
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CPI eqn
CPI=(price of basket of goods/services in current year)/(price of basket in base year) x 100
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Inflation in year 2 equation
= (CPI in year 2-CPI in year 1)/(CPI in year 1)x100
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Largest percentage of the CPI basket goes to ________
Transportation (19.3%)
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Indexation
the automatic correction of a dollar amount for the effects of inflation by law or contract
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COLA
cost-of-living-adjustment, automatically raises the wage when the CPI rises
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Nominal interest rate
the interest rate that is usually reported without a correction for the effects of inflation
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real interest rate
the interest rate that is corrected for the effects of inflation
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calculate real interest rate:
real interest rate=nominal interest rate - inflation rate
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Productivity
the quantity of goods and services produced from each hour of a worker's time
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How productivity is determined
- physical capital per worker
- human capital per worker
- natural resources
- technological knowledge
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Physical capital
the stock of equipment and structures that are used to produce goods and services
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human capital
the knowledge and skills that workers acquire through education, training, and experience
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natural resources
the inputs into the production of goods and services that are produced by nature, such as land, rivers, mineral deposits
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technological knowledge
society's understanding of the best ways to produce goods and services
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Deminishing returns
the benefit from an extra unit of input declines as the quantity of the input increases
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Catch-up effect
countries that start off poor tend to grow more rapidly than countries that start off rich
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Foreign direct investment
a capital investment that is owned and operated by a foreign entity
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Foreign indirect investment
an investment that is financed with foreign money operated by domestic residents
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Foreign portfolio investment
an investment that is financed with foreign money but operated by domestic residents
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Externalities
the effect of one person's actions on the well-being of a bystander
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Brain drain
the immigration of many of the most highly educated workers to rich countries, where they can enjoy a higher standard of living
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Property rights
the ability of people to exercise authority over the resources they own
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Financial System
the group of institutions in the economy that help to match one person's savings with another person's investment
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Two groups of financial systems
- Financial Markets
- Financial intermediaries
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Difference between the two groups of financial systems?
In financial markets savers know who they are lending their money too, in financial intermediaries savers don't know who their money is being lent to
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Bond
a certificate of indebtedness that specifies the obligation of the borrower to the holder of the bond
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debt finance
the sale of a bond to raise money
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Par value
dollar amount the borrower will pay back sometime in the future
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Coupon rate
borrower will pay an interest rate every year to the lender for the length of the bond
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Treasurer bills
bonds that mature in less than 2 years, no coupon rate, the difference b/w what you pay for the bond and the par value acts as the interest
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Bond-grading agencies
agencies that look at each bond and assign them a grade
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stock
represents ownership in a firm, and is, therefore, a claim to its profits
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equity finance
the sale of a stock to raise money
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Stock index
the average of a group of stock prices, ex. the Dow Jones Industrial Average, the S&P/TSX Composite Average
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Financial Intermediaries
financial institutions through which savers can indirectly provide funds to borrowers
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Bank
Primary function-take deposits from savers and use these deposits to make loans to people who want to borrow
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Mutual funds
institution that sells shares to the public and uses proceeds to buy a portfolio of stocks and bonds
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Accounting
refers to how various numbers are defined and added up
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In a closed economy, NX=_____
0
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National Saving
(S), the total income in the economy that remains after paying for consumption and gov't purchases
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Private saving
income that households have left after paying for taxes and consumption
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Public saving
tax revenue that the gov't has left after paying for its spending
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Market for Loanable Funds
the market in which those who want to save supply funds and those who want to borrow to invest demand funds
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Gov't debt
the sum of past budget deficits and surpluses
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Crowding out
a decrease in investment that results from government borrowing
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Natural rate of unemployment
the amount of unemployment the economy normally experiences
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Cyclical unemployment
the year-to-year fluctuations in unemployment around the natural rate
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Labour force
the total number of workers, including both the employed and the unemployed
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LF eqn
LF=number of employed+number of unemployed
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Unemployment rate
percentage of the labour force that is unemployed
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Unemployment rate eqn
U=(#of unemployed)/(LF) x 100
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LFPR
Labour force percentage rate: percentage of the adult population that is in the labour force
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LFPR eqn
= (LF)/(Adult population) x 100
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Discouraged searchers
individuals who would like the work but have given up looking for a job
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