AP ECON Chapter 3 Vocabulary

AP ECON Chapter 3 Vocabulary National income and product accounts or national accounts National income and product accounts or national accounts National income and product accounts, or national accounts, keep track of the flows of money among different sectors of the economy. Household Household A household is a person or group of people who share income. Firm Household A household is a person or group of people who share income. Consumer spending Consumer spending Consumer spending is household spending on goods and services. Product markets Product markets Product markets are where goods and services are bought and sold. Factor markets Factor markets Factor markets are where resources, especially capital and labor, are bought and sold. Government spending Government spending Government spending is total expenditures on goods and services by federal, state, and local governments. Taxes Taxes Taxes are required payments to the government. Tax revenue Tax Revenue Tax revenue is the total amount the government receives from taxes. Disposable income Disposable income Disposable income, equal to income plus government transfers minus taxes, is the total amount of household income available to spend on consumption. Government transfers Government transfers Government transfers are payments that the government makes to individuals without expecting a good or service in return. Private savings Government transfers Government transfers are payments that the government makes to individuals without expecting a good or service in return. Financial markets Financial markets Financial markets channel private savings into investment spending and government borrowing. Government borrowing Government borrowing Government borrowing is the amount of funds borrowed by the government in the financial markets. Investment spending Investment spending Investment spending is spending on new productive physical capital, such as machinery and structures, and on changes in inventories. Inventories Investment spending Investment spending is spending on new productive physical capital, such as machinery and structures, and on changes in inventories. Exports Exports Exports are goods and services sold to other countries. Imports Imports Imports are goods and services purchased from other countries. Gross domestic product (GDP) Gross domestic product or GDP Gross domestic product, or GDP, is the total value of all final goods and services produced in the economy during a given year. Expenditure approach Expenditure approach The expenditure approach to calculating GDP adds up aggregate spending on domestically produced final goods and services in the economy—the sum of consumer spending, investment spending, government purchases of goods and services, and exports minus imports. Aggregate spending Total sum of the amount of spending. Income approach Income approach The income approach to calculating GDP adds up the total factor income earned by households from firms in the economy, including rent, wages, interest, and profit. Value-added approach Value-added approach The value-added approach to calculating GDP surveys firms and adds up their contributions to the value of final goods and services. Final goods and services Final goods and services Final goods and services are goods and services sold to the final, or end, user. Intermediate goods and services Intermediate goods and services Intermediate goods and services are goods and services bought from one firm by another firm to be used as inputs into the production of final goods and services. Net exports Net exports Net exports are the difference between the value of exports and the value of imports (X − M). Value added Value added The value added by a producer is the value of its sales minus the value of its purchases of inputs. Aggregate output Aggregate output Aggregate output is the total quantity of final goods and services produced within an economy. Real GDP Real GDP Real GDP is the total value of all final goods and services produced in the economy during a given year, calculated using the prices of a selected base year in order to remove the effects of price changes. Nominal GDP Nominal GDP Nominal GDP is the total value of all final goods and services produced in the economy during a given year, calculated with the prices current in the year in which the output is produced. GDP per capita GDP per capita GDP per capita is GDP divided by the size of the population; it is equivalent to the average GDP per person. Employed Employed Employed people are currently holding a job in the economy, either full time or part time. Unemployed Unemployed Unemployed people are actively looking for work but aren’t currently employed. Labor force Labor force The labor force is equal to the sum of the employed and the unemployed. Labor force participation rate Labor force participation rate The labor force participation rate is the percentage of the population aged 16 or older that is in the labor force. Unemployment rate Unemployment rate The unemployment rate is the percentage of the total number of people in the labor force who are unemployed. Discouraged workers Discouraged workers Discouraged workers are nonworking people who are capable of working but have given up looking for a job due to the state of the job market. Marginally attached workers Marginally attached workers Marginally attached workers would like to be employed and have looked for a job in the recent past but are not currently looking for work. Underemployed Underemployed The underemployed are workers who would like to work more hours or who are overqualified for their jobs. Frictional unemployment Frictional unemployment Frictional unemployment is unemployment due to the time workers spend in job search. Structural unemployment Structural unemployment Structural unemployment is unemployment that results when workers lack the skills required for the available jobs, or there are more people seeking jobs in a labor market than there are jobs available at the current wage rate. Efficiency wages Efficiency wages Efficiency wages are wages that employers set above the equilibrium wage rate as an incentive for better employee performance. Natural rate of unemployment Natural rate of unemployment The natural rate of unemployment is the unemployment rate that arises from the effects of frictional plus structural unemployment. Cyclical unemployment Cyclical unemployment Cyclical unemployment is the deviation of the actual rate of unemployment from the natural rate. Real wage Real wage The real wage is the wage rate divided by the price level to adjust for the effects of inflation or deflation. Real income Real income Real income is income divided by the price level to adjust for the effects of inflation or deflation. Inflation rate The inflation rate The inflation rate is the percentage increase in the overall level of prices per year. Shoe-leather costs Shoe-leather costs Shoe-leather costs are the increased costs of transactions caused by inflation. Menu costs Menu costs Menu costs are the real costs of changing listed prices. Unit-of-account costs Unit-of-account costs Unit-of-account costs arise from the way inflation makes money a less reliable unit of measurement. Nominal interest rate Nominal interest rate The nominal interest rate is the interest rate actually paid for a loan. Real interest rate Real interest rate The real interest rate is the nominal interest rate minus the rate of inflation. Disinflation Disinflation Disinflation is the process of bringing the inflation rate down. Aggregate price level Aggregate price level The aggregate price level is a measure of the overall level of prices in the economy. Market basket Market basket A market basket is a hypothetical set of consumer purchases of goods and services. Base year Base year The base year is the year arbitrarily chosen for comparison when calculating a price index. The price level compares the price of the market basket of goods in a given year to its price in the base year. Price index Price index A price index measures the cost of purchasing a given market basket in a given year. The index value is always equal to 100 in the selected base year. Substitution bias Substitution bias Substitution bias occurs in the CPI because, over time, items with prices that have risen most receive too much weight (because households substitute away from them), while items with prices that have risen least are given too little weight (because households shift their spending toward them). Consumer price index (CPI) Consumer price index or CPI The consumer price index, or CPI, measures the cost of the market basket of a typical urban American family. Producer price index (PPI) Producer price index or PPI The producer price index, or PPI, measures the prices of goods and services purchased by producers. GDP deflator GDP deflator The GDP deflator for a given year is 100 times the ratio of nominal GDP to real GDP in that year.