Macroeconomics

aggregate output

The total amount of output produced in the economy.

aggregate private spending

The sum of all nongovernment spending. Also called private spending.

aggregate production function

The relation between the quantity of aggregate output produced and the quantities of inputs used in production.

bank reserves

Holdings of central bank money by banks. The difference between what banks receive from depositors and what they lend to firms or hold as bonds.

bond

A financial asset that promises a stream of known payments over some period of time.

central bank money

Money issued by the central bank. Also known as the monetary base and high-powered money.

Cobb-Douglas production function

A production function giving output as a weighted geometric average of labor and capital.

consumer price index CPI

The cost of a given list of goods and services consumed by a typical urban dweller.

consumption (C)

Goods and services purchased by consumers.

consumption function

A function that relates consumption to its determinants.

consumption of fixed capital

Depreciation of capital.

devaluation

A decrease in the exchange rate (E) in a fixed exchange rate system.

disposable income

The income that remains once consumers have received transfers from the government and paid their taxes.

dividends

The portion of a corporation’s profits that the firm pays out each period to its shareholders

equilibrium

The equality between demand and supply.

equilibrium in the goods market

The condition that the supply of goods be equal to the demand for goods.

exports (X)

The purchases of domestic goods and services by foreigners.

Federal Reserve Bank (Fed)

he U.S. central bank.

fiscal policy

A government’s choice of taxes and spending.

foreign direct investment

The purchase of existing firms or the development of new firms by foreign investors.

GDP deflator

The ratio of nominal GDP to real GDP; a measure of the overall price level. Gives the average price of the final goods produced in the economy.

gross domestic product (GDP)

A measure of aggregate output in the national income accounts. (The market value of the goods and services produced by labor and property located in the United States.)

gross domestic product (GDP) (versus gross national product (GNP))

Gross domestic product measures value added domestically. Gross national product measures value added by domestic factors of production.

imports (Q)

The purchases of foreign goods and services by domestic consumers, firms, and the government.

income

The flow of revenue from work, rental income, interest, and dividends.

inflation

a sustained rise in the general level of prices.

International Monetary Fund (IMF)

The principal international economic organization. Publishes the World Economic Outlook annually and the International Financial Statistics (IFS) monthly.

investment (I)

Purchases of new houses and apartments by people, and purchases of new capital goods (machines and plants) by firms.

IS curve

downward-sloping curve relating output to the interest rate. The curve corresponding to the IS relation, the equilibrium condition for the goods market

IS relation

An equilibrium condition stating that the demand for goods must be equal to the supply of goods, or equivalently that investment must be equal to saving. The equilibrium condition for the goods market.

J-curve

A curve depicting the initial deterioration in the trade balance caused by a real depreciation, followed by an improvement in the trade balance.

liquidity

An asset is liquid if it can be sold quickly. A financial institution is liquid if it can sell its assets quickly.

LM curve

An upward-sloping curve relating the interest rate to output. The curve corresponding to the LM relation, the equilibrium condition for financial markets.

long run

A period of time extending over decades.

medium run

A period of time between the short run and the long run.

national income

In the United States, the income that originates in the production of goods and services supplied by residents of the United States.

net exports

The difference between exports and imports. Also called the trade balance.

net interest

In the national income and product accounts, the interest paid by firms minus the interest received by firms, plus interest received from the rest of the world minus interest paid to the rest of the world.

nominal GDP

The sum of the quantities of final goods produced in an economy times their current price. Also known as dollar GDP and GDP in current dollars.

nominal interest rate

The interest rate in terms of the national currency (in terms of dollars in the United States). It tells us how many dollars one has to repay in the future in exchange for borrowing one dollar today.

output gap

The difference between actual output and potential output.

output per person

A country’s gross domestic product divided by its population.

paradox of saving

The result that an attempt by people to save more may lead both to a decline in output and to unchanged saving.

private saving (S)

Saving by the private sector. The value of consumers’ disposable income minus their consumption.

primary surplus

Government revenues minus government spending, excluding interest payments on the debt.

production function

The relation between the quantity of output and the quantities of inputs used in production.

propensity to consume (c1)

The effect of an additional dollar of disposable income on consumption.

public saving

Saving by the government; equal to government revenues minus government spending. Also called the budget surplus. (A budget deficit represents public dissaving.)

purchasing power

Income in terms of goods.

purchasing power parity (PPP)

A method of adjustment used to allow for international comparisons of GDP.

real exchange rate

The relative price of domestic goods in terms of foreign goods.

real GDP

A measure of aggregate output. The sum of quantities produced in an economy times their price in a base year. Also known as GDP in terms of goods, GDP in constant dollars, or GDP adjusted for inflation.

real interest rate

The interest rate in terms of goods. It tells us how many goods one has to repay in the future in exchange for borrowing the equivalent one good today.

recession

A period of negative GDP growth. Usually refers to at least two consecutive quarters of negative GDP growth

regression

The output of ordinary least squares. Gives the equation corresponding to the estimated relation between variables, together with information about the degree of fit and the relative importance of the different variables.

regression line

The best-fitting line corresponding to the equation obtained by using ordinary least squares.

saving

The sum of private and public saving, denoted by S.

share

A financial asset issued by a firm that promises to pay a sequence of payments, called dividends, in the future. Also called stock.

short run

A period of time extending over a few years at most.

short-term interest rate

The interest rate on a short-term bond (typically a year or less).

stagflation

The combination of stagnation and inflation.

tariffs

Taxes on imported goods.

trade balance

The difference between exports and imports. Also called net exports.

trade deficit

negative trade balance, that is, imports exceed exports.

unemployment rate

The ratio of the number of unemployed to the labor force.

value added

The value a firm adds in the production process, equal to the value of its production minus the value of the intermediate inputs it uses in production.