Key Terms

characterizes the process whereby an economy as a whole turns economic inputs such as human capital, physical capital, and technology into total economic output (real GDP)

an increase by society in the average level of physical and/or human capital per person

the rights of individuals to enter into agreements with others regarding the use of their property providing recourse through the legal system in the event of noncompliance

pattern in which economies with low per capita incomes grow faster than economies with high per capita incomes and thereby catch up

the accumulated skills and education of workers

the widespread use of power-driven machinery and the economic and social changes that occurred in the first half of the 1800s

a component of physical capital that facilitates trade, including transportation (e.g., roads and rail systems)

putting advances in knowledge to use in a new product or service

advances in knowledge

the value of what is produced per worker, or per hour worked (sometimes called worker productivity)

the period of rapid economic growth from 1870 onward

the plant and equipment used in production (includes infrastructure)

characterizes the process whereby a firm turns economic inputs like labor, machinery, and raw materials into economic outputs (e.g., goods or services for consumers)

when civil institutions enforce rule-based protections of individual and entity rights to use their property as they see fit. Laws must be clear, public, fairly enforced, and applicable to all members of society.

area of a country, usually with access to a port where, among other benefits, the government does not tax trade

a combination of invention—advances in knowledge—and innovation

all the ways in which existing inputs produce more or higher quality, as well as different and altogether new products

if an employer reduces wages for all workers, the best are most likely to leave

unemployment that is closely tied to the business cycle, like higher unemployment during a recession

those who have stopped looking for employment due to the lack of suitable positions available

argues that the productivity of a firm’s workers increases if the employer pays them more, since this increases the cost of being fired

unemployment that occurs as workers move between jobs; part of the natural rate of unemployment

an unwritten agreement in the labor market that the employer will try to keep wages from falling when the economy is weak or the business is having trouble, and the employee will not expect huge salary increases when the economy or the business is strong

the interests workers already working for the firm (the “insiders”) differ from those who do not (the “outsiders”), since insiders may prefer higher wages even if it constrains employment

this is the percentage of adults in an economy who are either employed or who are unemployed and looking for a job

the unemployment rate that would exist in a growing and healthy economy (given its economic, social, and political factors); frictional and structural unemployment

those who are not working and not looking for work—whether they want employment or not; also termed “not in the labor force”

across-the-board wage cuts are hard for an economy to implement, since workers resist wage cuts at each individual firm

unemployment that occurs because individuals lack skills currently valued by employers

individuals who are employed in jobs that are below their skill levels

the percentage of adults who are seeking jobs (and thus in the labor force) but do not have jobs

a home loan where the interest rate is not fixed; the interest rate varies with one or more market interest rates

arbitrary year whose value as an index number economists define as 100;

Inflation from the base year to other years can easily be seen by comparing the index number in the other year to the index number in the base year. For example, if the index number for a year is 105, then there has been exactly 5% inflation between that year and the base year.

specified quantities of goods and services one meant to represent “typical” consumer purchases; used as a basis for calculating how the price level changes over time

a measure of inflation that U.S. government statisticians calculate based on the price of a basket of goods and services that represents an “average” consumer's purchases

a more stable measure of inflation typically calculated by taking the CPI and excluding particularly volatile economic variables such as food and energy prices; used to better capture long-run trends in prices

a provision in a labor contract that wage increases will keep up with inflation; also a similar provision for payout growth in a pension contract

negative inflation; on average, prices in the economy are falling

a measure of the avaerage compensation of civilian workers; used to measure inflation based on wages, salaries, and benefits paid in the civilian labor market

a price index used to measure inflation that is based on the prices of all the GDP components

very high inflation; inflation above 50% per month

a price, wage, or interest rate is indexed if it is adjusted automatically for inflation

a general and ongoing rise in price levels in an economy

a measure of inflation based on prices paid for supplies and inputs by producers of goods and services

overestimate of inflation due to neglected innovation and quality changes.

inflation calculated using a fixed basket of goods over time tends to overstate the true rise in cost of living, because it does not account for improvements in the quality of existing goods or the invention of new goods

overestimate of inflation due to neglect of changes in consumer behavior;

an inflation rate calculated using a fixed basket of goods over time tends to overstate the true rise in the cost of living, because it does not take into account that the person can substitute away from goods whose prices rise considerably

the total spending on domestic goods and services in an economy, summarized by four expenditure categories: C+I+G+(X-M)

summarizes the total spending (from all sources) on domestic goods and services at each price level

describes the determinates of aggregate supply (AS) and of aggregate demand (AD) for the economy, and explains how AD and AS interact at the macroeconomic level

the total quantity of output (i.e. real GDP) firms produce and sell

summarizes the total quantity of output (i.e. real GDP) that firms will produce and sell at each price level

another name for potential GDP

portion of the SRAS curve where GDP is below potential but not so far below as in the Keynesian zone; in the intermediate zone, the SRAS curve is upward-sloping but not vertical

“demand creates its own supply”; firms increase production in response to increases in expenditure

generally emphasizes the importance of aggregate demand in determining the size of the macroeconomy, especially in the short run

portion of the SRAS curve where GDP is far below potential and the SRAS curve is flat

vertical line at potential GDP; shows no relationship between the price level for output and real GDP in the long run

generally emphasizes the importance of aggregate supply in determining the size of the macroeconomy, especially in the long run

portion of the SRAS curve where GDP is at or near potential output and the SRAS curve is steep

the level of production when the economy is producing at its sustainable potential and unemployment is at the natural rate of unemployment; the maximum quantity that an economy can sustainably produce given full employment of its existing levels of labor, physical capital, technology, and institutions

“supply creates its own demand”; production generates the income that is spent on production

positive short run relationship between the price level for output and real GDP, holding the prices of inputs fixed

simultaneous stagnant growth and high inflation

tax increases or cuts in government spending designed to decrease aggregate demand and reduce inflationary pressures

downward wage and price flexibility requires perfect information about the level of lower compensation acceptable to other laborers and market participants

income after taxes

tax cuts or increases in government spending designed to stimulate aggregate demand and move the economy out of recession

Keynesian concept that asserts that a given change in autonomous spending causes a larger change in real GDP

equilibrium at a level of output above potential GDP

occurs when what happens at the macro level is different from and possibly inferior to what happens at the micro level; an example would be where upward sloping supply curves for firms become a flat aggregate supply curve, illustrating that the price level cannot fall to stimulate aggregate demand

costs firms face in changing prices

the tradeoff between unemployment and inflation

the amount of goods and services actually produced in a nation (e.g., in a given year)

equilibrium at a level of output below potential GDP

a situation where wages and prices do not fall in response to a decrease in demand, or do not rise in response to an increase in demand

the proposal that people look at past experience and gradually adapt their beliefs and behavior as circumstances change

the future rate of inflation that consumers and firms build into current decision making

the view that the most important determinant of GDP is potential GDP, and in the long run the business cycle will fluctuate around the potential GDP.

the average amount of machinery and equipment available to help workers produce a good or service

the proposal that people form accurate expectations about the future, using all information available to them