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Macro Econ Exam 1
Myoung Lee - Fall 2012
79
Economics
Undergraduate 3
09/26/2012

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Term
Positive Statement
Definition
"How the world is"
True statements, not opinion
Term
Normative Statement
Definition
"How the world should be"
Opinion statements, can't be proven
Term
Rational People
Definition
People who purposely do the best they can to achieve their objectives.
All economics based on "rational people"
Term
Macro-Econ
Definition
The study of economy-wide phenomena.
Includes inflation, unemployment and economic growth
Term
Micro-Econ
Definition
The study of how households and firms make decisions and interact in markets
Term
4 factors of Production (Resources)
Definition
Land (Rent), Labor (Wages), Capital (Interest), and Entrepreneurship (Profit)
Term
Renewable Resources
Definition
Resources that can be depleted but replenished
Term
Exhaustible Resources
Definition
Resources that can't be renewed and can be depleted
Term
Fixed Resources
Definition
Resources that can't be replenished or depleted
Term
Labor
Definition
The work and time people devote to production
Term
Capital
Definition
Something produced that is long lasting used to make other things used to produce goods
Term
Capital Stock
Definition
Total amount of capital at a nations disposal at any time
Term
Entrepreneurship
Definition
Human resource that organizes labor, land and capital.
Term
Production Possibilities Frontier
Definition
A graph showing the combinations of output that the economy can possibly produce given the available factors of production
Term
Production Efficiency
Definition
When the economy is getting everything out of the scarce resources it has available
Term
Production Inefficiency
Definition
When the economy is producing less than it could from the resources available
Term
Production Unattainable
Definition
Desirable but unattainable amount of production due to the resources available
Term
Allocative Efficiency
Definition
When Marginal Cost = Marginal Benefit, it is impossible to make people better off by reallocating resources
Term
Opportunity Cost
Definition
Whatever must be given up in order to obtain some item
Term
Law of Increasing Opportunity Cost (PPF)
Definition
Bowed out - Increasing
Straight line - Constant
Term
Absolute Advantage
Definition
The ability to produce a good using fewer inputs than another producer
Term
Comparative Advantage
Definition
The ability to produce a good at a lower opportunity cost than another producer.
The producer that has the smaller opportunity cost of producing a good
Term
Specialization of Trade
Definition
When two countries specialize in production of the good they are more suitable to produce and then trade with each other
Term
Gains from trade
Definition
Specializing on Comparative Advantage, countries can produce more of both goods
Term
Productivity
Definition
The amount of goods produced for each hour of a workers time
Term
Extensive Growth
Definition
When a society acquires new resources.
Includes capital accumulation and an increase in the labor force
Term
Capital accumulation
Definition
An increase in capital (things used to produce more goods)
Ex. more factories
Term
Intensive Growth
Definition
When a society learns to produce more using existing resources.
Increase in human capital (skills of workers) and technological change
Term
Cost of Economic Growth
Definition
The present consumption given to developing technology or increasing capital
Term
Firm
Definition
An economic unit that hires and organizes factor of production to produce and sell goods
Term
Household
Definition
An economic unit that buys and consumes goods
Term
Market
Definition
Any arrangement that allows buyers and sellers to interact and exchange info
Term
Aggregation
Definition
The combining of distinct things into a single whole
Term
Competitive Market
Definition
A market with so many buyers and sellers that each has a small impact on the market price
Term
Money Price
Definition
The amount of money that must be given up
Term
Relative Price
Definition
The ratio of one money price to another
Term
Property Rights
Definition
The arrangement that governs the ownership, use and disposal of resources, goods and services.
Includes Real Property, Financial Property, and Intellectual Property
Term
Real Property
Definition
Land
Term
Financial Property
Definition
Stocks
Term
Intellectual Property
Definition
Intangible products protected by copy rights and patents
Term
Law of Demand
Definition
The quantity demanded of a good decreases when the price increases
Term
Substitution Effect (Law of Demand)
Definition
When the relative price of a good changes, people buy less of the good and more of its substitute
Term
Income Effect (Law of demand)
Definition
The increase of the price of a good causes a decrease in the demand of the good
Term
5 factors of the change in demand
Definition
Income vs. wealth
Price of other related goods
Preferences
Population
Expectation
Term
Normal good
Definition
Demand increase when income increases.
Cars, clothing
Term
Inferior goods
Definition
Demand decreases when income increases
Frozen dinners
Term
Income-neutral goods
Definition
Demand same when income increases or decreases
Sampoo
Term
Substitutes
Definition
Two goods for which and increase in price leads to to an increase in the demand for one of the goods
Term
Complements
Definition
Two goods for which an increase in the price of one leads to a decrease in the demand for the other
Term
Preferences
Definition
Demand goes up when people like a good
Term
Population
Definition
Demand goes up when population grows
Term
Expectation
Definition
Expectations about the future may effect demand today.
Gasoline
Term
Law of Supply (Marginal Cost)
Definition
The quantity supplied of a good rises when the price of a good rises
Term
Prices of Productive Resources
Definition
Supply is increasing when the input price is decreasing
Term
Number of sellers (Law of Supply)
Definition
Supply increases when there are more sellers
Term
Expectations (Law of Supply)
Definition
Supply increases "today" when price is expected to decrease tomorrow
Term
Equilibrium
Definition
When production achieves quantity supplies = quantity demanded
Term
Price Regulators
Definition
Excess demand - Shortage (QD>QS) Excess supply - Surplus (QD
Term
Product (Output) Markets
Definition
The markets in which goods and services are exchanged
Term
Factor (Input) Markets
Definition
The markets in which resources used to produce more products are exchanged
Term
3 goals of Macro econ
Definition
1. Economic Growth
2. Full employment (low unemployment)
3. Stable prices
- achieving all of theses gives us opportunity to make all citizens better off
Term
Gross Domestic Product
Definition
The market value of all finals goods and services produced within a country in a given period
Term
Real GDP
Definition
The production of goods and services valued at constant prices
Term
Potential GDP
Definition
The value of production when all the economy's labor, land, and entrepreneurial ability are fully employed
Term
Rule of 70
Definition
The growth rate of a variable is x per year, the variable doubles at 70/x
Term
Market Value
Definition
The price at which each item is sold in markets
Term
Final goods and services
Definition
Only the goods that are sold to the final users. Excludes intermediate goods
Term
Intermediate goods
Definition
An item that is produced by one firm and purchased by another and used as a component of a final good
Term
Gross National Product
Definition
Total income earned world-wide by US firms and residents
Term
Expenditure Approach (Measuring GDP)
Definition
C + I + G + NX
C - Personal Consumption, purchases by households of currently produced goods
I - Private Investment, purchases by businesses
G - Government purchases - the purchases of newly produced goods and services by the government
NX - Net exports (total exports - total imports)
Term
Government Outlays (Government Spending)
Definition
Transfer payments - money redistributed from one group of citizens to another
Term
Value Added Approach (Calculate GDP)
Definition
The sum of value added by all firms in the economy
Term
The Factor Payments (Calculate GDP)
Definition
Sum of factor payments made by all firms in the economy.
= wages + interest + rent + profit + proprietor's net income = household income
Term
Nominal GDP
Definition
GDP that measures current price
Term
Real GDP
Definition
GDP adjusted for price changes, uses base year prices

P(in base year) x Q (in current year)
Term
GDP Deflator
Definition
A measure of the price level calculated as the ratio of nominal GDP to real GDP

(Nominal GDP/Real GDP) x 100
USE OPPOSITE YEAR OF BASE
Term
Economic Growth Rate
Definition
(Higher R GDP - Lower R GDP)/Lower R GDP
Term
Standard of Living
Definition
(R GDP/Person Higher - R GDP/Person Lower)/(R GDP/Person Lower)
Term
Things omitted from GDP
Definition
Non- market production
Underground economy
Quality of Life
Environment damage
Distribution of goods
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