Macroeconomics Key Terms Measuring National Income and Introduction to Development 1.

Circular Flow of Income: The circular flow of income is a neoclassical economic model depicting how money flows through the economy. 2. Gross Domestic Product (GDP): The gross domestic product (GDP) is one the primary indicators used to gauge the health of a country's economy. 3. Gross National Product (GNP): An economic statistic that includes GDP, plus any income earned by residents from overseas investments, minus income earned within the domestic economy by overseas residents. 4. Net National Product (NNP): The monetary value of finished goods and services produced by a country's citizens, whether overseas or resident, in the time period being measured (i.e., the gross national product, or GNP) minus the amount of GNP required to purchase new goods to maintain existing stock (i.e., depreciation). 5. Nominal GDP: A gross domestic product (GDP) figure that has not been adjusted for inflation. Also known as "current dollar GDP" or "chained dollar GDP." 6. Real GDP: An inflation-adjusted measure that reflects the value of all goods and services produced in a given year, expressed in base-year prices. Often referred to as "constantprice," "inflation-corrected" GDP or "constant dollar GDP". 7. Per Capita GDP: A measure of the total output of a country that takes the gross domestic product (GDP) and divides it by the number of people in the country. The per capita GDP is especially useful when comparing one country to another because it shows the relative performance of the countries. A rise in per capita GDP signals growth in the economy and tends to translate as an increase in productivity. 8. Human Development Index (HDI): The first Human Development Report introduced a new way of measuring development by combining indicators of life expectancy, educational attainment and income into a composite human development index, the HDI. Macroeconomics Models 1. Aggregate Demand (AD): The total amount of goods and services demanded in the economy at a given overall price level and in a given time period. 2. Consumption: The use of goods and services by households. 3. Investment: The purchase of capital goods such as machinery, technology and buildings used to increase the production of consumer goods and services in the future. 4. Inflationary Gap: A macroeconomic condition that describes the distance between the current level of real gross domestic product (GDP) and full employment (long run equilibrium) real GDP. The inflationary gap is so named because the relative increase in real GDP causes an economy to increase its consumption, which causes prices to rise in the long run. 5. Deflationary Gap: a situation in which total spending in an economy is insufficient to buy all the output that can be produced with full employment. 6. Business Cycle (Trade Cycle): The recurring and fluctuating levels of economic activity that an economy experiences over a long period of time. The five stages of the business cycle are growth (expansion), peak, recession (contraction), trough and recovery. At one time, business cycles were thought to be extremely regular, with predictable

durations, but today they are widely believed to be irregular, varying in frequency, magnitude and duration. Demand-Side and Supply-Side Policies 1. Demand-Side Policies: Aggregate demand consists of consumption, gov't spending, investment (savings), and net exports. To affect these variables, interest rates can be manipulated to try and achieve certain fluctuations in the aggregate demand variables. For example, fiscal policy is a demand-side policy. 2. Fiscal Policy: Government spending policies that influence macroeconomic conditions. Through fiscal policy, regulators attempt to improve unemployment rates, control inflation, stabilize business cycles and influence interest rates in an effort to control the economy. Fiscal policy is largely based on the ideas of British economist John Maynard Keynes (18831946), who believed governments could change economic performance by adjusting tax rates and government spending. 3. Monetary Policy: The actions of a central bank, currency board or other regulatory committee that determine the size and rate of growth of the money supply, which in turn affects interest rates. Monetary policy is maintained through actions such as increasing the interest rate, or changing the amount of money banks need to keep in the vault (bank reserves). 4. Aggregate supply (AS): The total supply of goods and services produced within an economy at a given overall price level in a given time period. It is represented by the aggregate-supply curve, which describes the relationship between price levels and the quantity of output that firms are willing to provide. Normally, there is a positive relationship between aggregate supply and the price level. Rising prices are usually signals for businesses to expand production to meet a higher level of aggregate demand. 5. Short-Run Aggregate Supply (SRAS): During the short-run, firms possess one fixed factor of production (usually capital). This does not however prevent outward shifts in the SRAS curve, which will result in increased output/real GDP at a given price. Therefore, a positive correlation between price level and output is shown by the SRAS curve. 6. Long-Run Aggregate Supply (LRAS): Over the long run, only capital, labour, and technology affect the LRAS in the macroeconomic model because at this point everything in the economy is assumed to be used optimally. In most situations, the LRAS is viewed as static because it shifts the slowest of the three. The LRAS is shown as perfectly vertical, reflecting economists' belief that changes in aggregate demand (AD) have an only temporary change on the economy's total output. 7. Supply-Side Policies: Lower inflation, lower unemployment, improved economic growth, improved trade and balance of payments. Unemployment and Inflation 1. Unemployment: Unemployment occurs when a person who is actively searching for employment is unable to find work. Unemployment is often used as a measure of the health of the economy. The most frequently cited measure of unemployment is the unemployment rate. This is the number of unemployed persons divided by the number of people in the labor force.

2. Full Employment: A situation in which all available labor resources are being used in the most economically efficient way. Full employment embodies the highest amount of skilled and unskilled labor that could be employed within an economy at any given time. The remaining unemployment is frictional. 3. Underemployment: A measure of employment and labor utilization in the economy that looks at how well the labor force is being utilized in terms of skills, experience and availability to work. 4. Unemployment Rate: A measure of employment and labor utilization in the economy that looks at how well the labor force is being utilized in terms of skills, experience and availability to work. 5. Structural Unemployment: A longer-lasting form of unemployment caused by fundamental shifts in an economy. Structural unemployment occurs for a number of reasons workers may lack the requisite job skills, or they may live far from regions where jobs are available but are unable to move there. Or they may simply be unwilling to work because existing wage levels are too low. So while jobs are available, there is a serious mismatch between what companies need and what workers can offer. Structural unemployment is exacerbated by extraneous factors such as technology, competition and government policy. 6. Frictional Unemployment: Unemployment that is always present in the economy, resulting from temporary transitions made by workers and employers or from workers and employers having inconsistent or incomplete information. 7. Seasonal Unemployment: Periodic unemployment created by seasonal variations in particular industries, especially industries such as construction that are affected by the weather. 8. Cyclical Unemployment: A factor of overall unemployment that relates to the cyclical trends in growth and production that occur within the business cycle. When business cycles are at their peak, cyclical unemployment will be low because total economic output is being maximized. When economic output falls, as measured by the gross domestic product (GDP), the business cycle is low and cyclical unemployment will rise. 9. Real Wage Unemployment: Real Wage unemployment occurs when wages are above the equilibrium level causing the supply of labor to be greater than demand. 10. Inflation: inflation is a rise in the general level of prices of goods and services in an economy over a period of time. 11. Demand-Pull Inflation: A term used in Keynesian economics to describe the scenario that occurs when price levels rise because of an imbalance in the aggregate supply and demand. When the aggregate demand in an economy strongly outweighs the aggregate supply, prices increase. Economists will often say that demand-pull inflation is a result of too many dollars chasing too few goods. 12. Cost-Push Inflation: A phenomenon in which the general price levels rise (inflation) due to increases in the cost of wages and raw materials. 13. Deflation: deflation is a decrease in the general price level of goods and services. Deflation occurs when the inflation rate falls below 0%. Distribution of Income 1. Direct Taxation: A tax that is paid directly by an individual or organization to the imposing entity. A taxpayer pays a direct tax to a government for different purposes,

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including real property tax, personal property tax, income tax or taxes on assets. Direct taxes are different from indirect taxes, where the tax is levied on one entity, such as a seller, and paid by another, such a sales tax paid by the buyer in a retail setting. Indirect Taxation: A tax that increases the price of a good so that consumers are actually paying the tax by paying more for the products. An indirect tax is most often thought of as a tax that is shifted from one taxpayer to another, by way of an increase in the price of the good. Fuel, liquor and cigarette taxes are all considered examples of indirect taxes, as many argue that the tax is actually paid by the end consumer, by way of a higher retail price. Progressive Taxation: A tax that takes a larger percentage from the income of highincome earners than it does from low-income individuals. The United States income tax is considered progressive. Regressive Taxation: A tax that takes a larger percentage from low-income people than from high-income people. A regressive tax is generally a tax that is applied uniformly. This means that it hits lower-income individuals harder. Proportional Taxation: A tax system that requires the same percentage of income from all taxpayers, regardless of their earnings. A proportional tax applies the same tax rate across low-, middle- and high-income taxpayers. The proportional tax is in contrast to a progressive tax, where taxpayers with higher incomes pay higher tax rates than taxpayers with lower incomes. (Also called a flat tax)