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Flashcards by M. Arief Fakhruddin, updated more than 1 year ago
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| Question | Answer |
| Twelve Principles of Economics | 1. Scarce resources 2. Opportunity cost 3. Marginal analysis (cost/benefit analysis) 4. Incentives 5. Gains from trade 6. Equilibrium (and transition periods) 7. Efficient allocation 8. Market mechanism and efficiency 9. Government intervention 10. Spending = income (less spending = more income) 11. Too little spending (negatively effects the economy) 12. Government policy (Keynesian economics, taxation, monetary policy, spending) |
| Models | Simplified representations of reality which allow economists to observe and make test on the economy. |
| Production Possibility Frontier (PPF) | Maximum quantity of one good which can be produced for any given quantity of the other good How to judge relation between trade-offs and opportunity cost |
| Law of Diminishing Returns | If you produce more of good A, you will begin to neglect good B; therefore it is less efficient to focus any attention on good B. |
| Comparative Advantage | David Ricardo It is better to specialize in making a good which you have a low opportunity cost in making, and trade with someone who has a lower opportunity cost in the production of something you need. |
| Positive vs. Normative Economics | Positive economics: describes how the economy actually functions (think descriptive) Normative economics: describes or offers solutions to how an economy should be or should work (think prescriptive) |
| Supply and Demand (extreme basics) | As prices fall, demand increases Prices of supply rise with demand |
| Equilibrium (Supply & Demand) | Intersection between the supply and demand curves Market usually finds this point organically, but if not sometimes government intervenes (Keynesian economics) |
| Competitive Market | Based on supply and demand Demand dictates which goods and services the consumers want/would pay money for Supply shifts to meet demand and adjusts costs accordingly Assumes perfect competition |
| Demand Curve | Goes from the top left of the graph to bottom right with a negative correlation Prices high, low demand. Prices low, high demand. |
| Ceteris Paribus | A way of keeping variables static in order to test one aspect of the economy. Literally, "all things remaining equal" (Though it is hardly ever true and possibly simplifying way too much) |
| Shift in Demand Curve | Rightward shift: greater demand Leftward shift: fall in demand Can be caused by price changes, income changes, change in taste or expectations, change in consumer population. |
| Normal Goods | Goods which respond normally to the logic of the market mechanism |
| Inferior Goods | Goods which gain negative social associations; sometimes from being "cheap", and so it becomes less popular |
| Substitutes | Goods which have a desirable alternative which will replace the brand-name or most popular good sufficiently and much more cheaply. Examples: "knock-off" brand names, or ebooks replacing real books |
| Complementary Goods | Goods which require a second good to go with it; must go along with each other. Example: petrol and a car |
| Supply Curve | Supply curve on a graph runs from the bottom left to the top right, with a positive correlation. Price down, supply up. Price up, supply down. |
| Shift in Supply Curve | Leftward shift: fall in supply Rightward shift: increase in supply Caused by change in price of inputs (resources needed to produce the good), change in price of related/complementary goods, technological progress, change in expectations and change in producer population. |
| Trial and Error | A way of finding equilibrium, according to market mechanism. A supplier tries out a price, and if no one buys or too many people buy it, they adjust the price accordingly until equilibrium is met. |
| Equilibrium Adjustment (Surplus and Shortage) | Equilibrium adjusts in different situations in order to restore equilibrium. Surplus situation of supply: price goes down, demand comes up Shortage situation of supply: prices goes up, demand goes down Creates a new equilibrium position |
| Invisible Hand of the Market | Adam Smith's idea that the market mechanism is self regulating and will keep supply and demand at equilibrium organically He believed that government intervention distorts the market mechanism |
| Price Ceiling | Government policy where there is a maximum price that a seller is allowed to charge for a good or service (pushes the price down) |
| Price Floor | Government policy where there is a minimum which a seller can charge for goods or services; minimum price a buyer is required to pay. Pushes prices up above equilibrium |
| Consequences of Price Ceilings | 1. Inefficiently low quantity 2. Inefficient allocation to customers (the people who want/need the good can't necessarily get it) 3. Wasted resources 4. Inefficiently low quality; inferior products produced by sellers, even though demand might allow for a higher quality product 5. Rise of black market goods |
| Consequences of Price Floors | 1. Inefficiently low quantity 2. Inefficient allocation of sales among sellers 3. Wasted resources 4. Inefficiently high quality (sellers might play with quality in order to sell at a higher price, even though many buyers would be willing to pay less for a worse product) 5. Rise in black market goods (below price floor) |
| Binding or Non-binding | If the price ceiling is set above the market equilibrium, it is non-binding (doesn't affect the market) If the price ceiling is set below the market equilibrium it is binding (it will affect the "natural" market) |
| Quota | Upper limit on a good which can be bought/sold, or a lower limit on a good which must be bought/sold. Sometimes there is a necessity of a license (the limited right to sell a good or service) |
| Quota Rent | Term given to government policies which drive a wedge between the demand price and the supply price (even if there are customers who would be willing to pay more, or suppliers who are willing to sell for less) |
| Minimum Wage Debate (against and for) | Against minimum wage: causes unemployment, causes inflation, discourages further education, promotes under-the-table work (black market) For minimum wage: promotes equity, prevents exploitation, stimulates consumption, increases work ethic, incentive for joining the work force |
| Gains from Trade | Suggests that if two economies trade goods and specialize, they can focus on the good in which they have a comparative advantage in producing |
| Asian Miracle (According to Paul Krugman) | Highly Performing Asian Economies (HPAE) have had unique growth (and equity) where the middle class benefits and not just the elites. (Japan, Malaysia, Thailand, Indonesia) Krugman thinks: climate, technology, labour/capital/resources, culture, "perspiration rather than inspiration" |
| Heckscher-Ohlin Factor | "A model of international trade in which a country has a comparative advantage in a good whose production is intensive in the factors that are abundantly available in that country" (Krugman glossary) |
| Leontief and Prebisch (3 concepts) | 1. Importance of human capital 2. Manufactured goods more important than agricultural goods (because they have long term higher value in the market) 3. Rates of exchange will change over time depending on what goods you are producing |
| World Market (Domestic vs. World Prices) | When the world price is lower than the domestic price, then import (at a lower price, consumer gain > producer loss) When the world price is higher than domestic price, then export (at a higher price, producer gain > consumer loss) |
| Four Types of Globalization | 1. Thin globalization: lateral, extensity, such as the silk trade in the 13th century 2. Expansive: extensity, impact, such as the Dutch East Indies Company 17th century 3. Diffuse: extensity, intensity, velocity 4. Thick: extensity, intensity, velocity, impact; today's globalization |
| Macroeconomics | Concerns overarching demand, supply, trends (not individual circumstances), policies Key terms: fiscal policy (government spending/taxes), monetary policy (controlling money supply, regulation) |
| Microeconomics | Focuses on the individual, particular business models, and investment decisions |
| 4 Business Cycle Theories | 1. Seasonal: within one year 2. Short-run: 2-3 years, most commonly used to study trends 3. Medium term (Juglar theory): 7-11 years, which is the distance between economic "peaks" 4. Long-run: >11 years, long-term development of the economy |
| Business Cycle Theory | Recession - expansion - recession again High demand and low supply makes producers strive to supply more until there is a surplus, and supply goes past the point of demand, and so a return to recession. Time-lag between investment and expansion/growth |
| Cobweb Model | Nicholas Kaldor (1908-1986) Business cycle circles the equilibrium price on a supply and demand graph, in attempts to get to equilibrium. Looks like a cobweb because of the shape made if you graph where supply and demand is around equilibrium |
| Consequences of The Great Depression | Major worldwide depression of the 1930's Made the government realized they really knew nothing about the economy and would need to find ways to intervene with the economy Made countries realize the need to cooperate internationally, because if every country worked based off self-interest, the depression would get worse (avoid protectionist policies) |
| The Great Depression | "Black Monday" Wall Street stock market crashed (Oct 28, 1929) Depreciation of currencies (especially pounds and American dollars) High unemployment Lasted 43 months |
| Say's Law | Each supply creates it's own demand |
| National Accounts | Developed during the Great Depression (1937) by Simon Kuznets Large data sets which record information in an economy (consumer spending, sales, investments, etc) Used to assess how the economy is performing Indicates economic development/growth Can be used to compare input/output of countries |
| Stocks | A share in the ownership of a company held by a shareholder |
| Dividends | Payment from corporation to shareholders (distribution or DIVIDE(nd) of profits) |
| Bond | Borrowing in the form of an IOU which pays interest (earn income from interest of investment) |
| Government Transfer | Payments made by the government to individuals for which no good or service is provided/available Often in the form of social insurance or tax benefits (subsidies, health care insurance, unemployment insurance) |
| Disposable Income | Total household income (minus taxes) which is available for consuming or saving (choice of individual) |
| Private Savings | Disposable income minus consumer spending |
| Exports and Imports | Exports: goods and services sold to other countries Imports: goods and services purchased from other countries |
| Inventories | Stock of goods and/or raw materials (input materials) |
| Investment Spending | Spending on physical capital (infrastructure, machinery) and on changes to inventories |
| Gross Domestic Product (GDP) | All official cash transactions which happen within the borders of an economy (country) Included in GDP: domestically produced goods and services, capital goods, new infrastructure and changes to inventory. GDP = consumer spending + investment spending + government purchases + sales to foreigners - import |
| Real GDP | Total value of goods and services each year; calculated using prices from a selected base year (for comparison) |
| Nominal GDP | Value of all final goods and services produced in the economy in given year; calculated using current prices of the year being studied (therefore affected by things like inflation) |
| Unemployment Rate | The percent of the total amount of people in the labour force who are unemployed Indicates how easy/hard it is to find a job Indicates how a country is doing economically Can either overstate or understate the true level of unemployment |
| Labour Force | All possible workers, aged 16+, who either have a job (employed) or are actively in the job search (unemployed) |
| Natural Unemployment (2 Types) and causes | Frictional Unemployment: Unemployment due to the time the worker spends in the job search (between jobs, school, etc) Cyclical Unemployment: What happens when the state of the economy is out of the control of the individual worker (recession, depression, etc) and are therefore unable to work Causes: changes in characteristics of labour force (demographics), change in labour market institutions (unions, temp agencies, new technology), change in government policies |
| Unnatural Unemployment (1 type) and causes | Structural Unemployment: more people are seeking jobs in a particular labour market than there are jobs available (at current minimum wage); even when the economy is at the peak of the business cycle Technological change can cause structural unemployment (technology replaces worker, or technology requires worker to be come more skilled) More job seekers than jobs Causes: minimum wage, labour unions, efficiency wages (incentives), government policies, skills mismatch |
| Discouraged Workers | Non-workers who have given up because they have experienced such difficulty finding a job (in the past 4 weeks) |
| Marginally Attached Workers | Possible workers who were available and looking for work but stopped (in the past year, but NOT in past 4 weeks) |
| Underemployed Workers | Workers who have a job, but it is not what they are trained for. Workers who work part time because they cannot find full time work (even though they would prefer it) |
| Jobless Recovery | Period where the real GDP is growing, but unemployment rate is still rising (as opposed to going down, as it should) |
| Inflation (External and Internal Factors) | Sustained increases in prices; usually it goes up but sometimes it goes down, like when technological advancements allow for cheaper production External factors example: agriculture prices increase due to poor harvest internationally Internal factores example: rising business costs |
| Cost-Push Inflation | Goods and services become more costly because of the price of an input good Example: Price oil rises which cause airline ticket prices rise |
| Demand-Pull Inflation | Strong demand pushes prices up Example: during holidays air line ticket prices rise because of the high demand |
| Inflation Rate | Yearly percentage change in inflation (usually based on the consumer price index) |
| Consumer Price Index (CPI) | Most common measurement of total price level; measures cost of the market based on a typical family (based on a "basket of goods") |
| Aggregate Price Level | Measure of overall prices in an economy, based on the market basket (hypothetical set of consumer purchases) |
| Price Index | Cost of purchasing basket of goods in a given year. Cost is normalized so that it is equal to 100 in selected base year |
| Interest Rate | Price (% of amount borrowed) which a lender charges for the use of savings for one year (cost of borrowing) |
| Nominal and Real Interest Rates | Nominal interest rate: interest rate expressed in dollars Real interest rate: nominal interest rate minus rate of inflation |
| Disinflation | The process the government uses in order to actively bring down inflation (often if the inflation rate is above 2-3%) Difficult to bring down, but sometimes necessary because high inflation can cause unemployment |
| Commodity Money | Original principle of money; based on the standard value for the material it was made of (usually silver, copper or gold); still stood for "value" the way ours does today |
| Fiat Money | When the value of money is agreed upon (the way it is today) Example: when we see a $50 bill, we get excited not because the physical bill is worth a lot but because we have agreed that it is worth a lot |
| Money Supply (3 types) | Total value of financial assets is considered to be money supply M1: Narrow money (all cash and easily convertable assets) M2: M1 + short-run deposits (debit, credit, ATM) M3: M1 + M2 + long-run deposits (secondary shares, stocks) |
| Banking | Takes deposits of money from consumers and puts that money into investments |
| Bank Reserves | Bank reserves is the money held back from investment in order to be available for withdrawls - never the full amount which has been deposited, based on the assumption that everyone wont want all their money at once |
| Reserve Ratio | The prescribed amount the bank must hold back from investment in order to have money available for withdrawls. Decided by organizers, and never the equal amounts of cash/deposits |
| Bank Runs | This happens when everyone removes all their money from banks, often at times of crisis (depressions/recessions) Can be extremely dangerous for banks |
| Gold Standard (Monetary System) | Existed between 1878-1936 Meant that money supply = gold reserve Collapsed after the Great Depression |
| Bretton Woods Monetary System | Designed in 1944 as a new economic system; implemented in 1946 Modelled after ideas of John Maynard Keynes Stabilized gold standard based on the US dollar |
| Current Monetary System (no real name) | Implemented after the Bretton Woods system, and involves variable exchange rates, which are less stable but more accurate The first truly worldwide system; offers opportunities for regional agreements (such as the EuroZone) |
| EuroZone | Economic system developed at the Treaty of Maastricht (1999/2002) Incorporated strict criteria: maximum government deficit of 3%, debt and GDP max of 60%, etc Not all European Countries are in the EuroZone |
| Washington Consensus | International ideology concerning bank systems was agreed upon and incorporated: The World Bank Ideology contained the so-called "10 Commandments" (such as market mechanism, free international trade, privatization, etc) |
| 10 Commandments (Washington Consensus) | 1. Fiscal policy discipline 2. Pro-growth public spending 3. Tax reform (less tax for the rich) 4. Market interest rate 5. Competitive exchange rates 6. Trade liberalization 7. FDI liberalization 8. Privatization 9. Deregulation 10. Property Right Security |
| Monetary Policy according to Milton Friedman (key terms) | Pro-market mechanism, anti-government spending Against the Keynesian economics and Bretton Woods system Neo-liberalism: Reagan & Thatcher Expansionary & Contractionary monetary policy |
| Expansionary Monetary Policy | Country should increase money supply, in order to lower interest rates and allow the market mechanism to take over Involves higher consumer spending |
| Contractionary Monetary Policy | Country should reduce money supply, allowing higher interest rates to limit the market mechanism This worked in China, but there it is risky because it can cause spike in inflation |
| Subprime Crisis (key points) | The US promoted home ownership, and banks gave out too many loans without enough checks to make sure the people receiving the loans could pay back. In 2007, house prices began to fall and people could not pay off their mortgages. Some blame the use of a bad economic model |
| Rule of 70 | Small improvements in growth rates which get magnified over time (power of compounding) 70 / % growth rate = doubling time for a variable Example: if real GDP/capita is growing at an annual rate of 3.5%, how fast will it double? 70 / 3.5 = 20 years |
| Convergence Hypothesis | International differences in real GDP/ capita tend to narrow over time |
| Aggregate Production Function | Hypothetical function which shows how productivity (real GDP per worker) depends on quantity of physical capital per worker, human capital per worker and state of technology |
| Total Factor Productivity (TFP) | The amount of output that can be produced with a given amount of factor input When TFP increases, the economy can produce more output with the same quantity of physical capital, human capital and labour |
| Information Technology Paradox | Robert Solow New technology does not yield full potential if it used in old ways Productivity only takes off when people change their way of doing business in order to take advantage of new technology |
| Thomas Malthus (Malthusian Trap) | Malthus feared the dangers of population growth, and was pessimistic about the future. He believed that as the population grew, limited resources (mainly food) would cause widespread famine and disease, and so keep populations in check. He discounted arguments in favour of technological advancements by saying that they only delay the inevitable. |
| Sustainable Long-Run Economic Growth | Long-run economic growth which can continue in the face of our finite planet (limited supplies of resources + limited ability to absorb environmental damage) |
| Deficit | When a governments budget revenue is less than its expenditures More money leaving the country than entering |
| Savings-Investment Identity | Accounting fact which states that savings and investment spending are always equal for the economy as a whole |
| Asset Price Theory | Traditional theory concerning rational considerations and expectations; assuming efficient market and free market mechanism |
| Loss Situation (Illiquidity & Insolvency) | Illiquidity: don't have the money, but you can pay off debt immediately if you get some Insolvency: can't handle the debt in the long-run; this is the step before bankruptcy |
| Financial Market | Similar to the commodity market, but instead of supply you have loans (which can be shaped by the government), and instead of demand you have the perception of investment opportunities |
| Recession vs Depression | Recession: consecutive quarters with negative growth in GDP Depression: sustained recession |
| Aggregate Demand | Aggregate output demanded by households, firms, the government, and the rest of the world. |
| Wealth Effect | As prices rise, purchasing power decreases (more money is needed to buy the same things) Spending then goes down because people can't afford to spend |
| Interest Rate Effect | Middle classes save more and so are more worried about inflation If savings worth goes down, then interest rates increase So as they see inflation rising, they may start saving more |
| Aggregate Demand Shift | Increase of aggregate demand sees shift to the right: people feel optimistic, they go out and spend more, and equilibrium is reestablished Decrease of aggregate demand sees a shift to the left: people become pessimistic and tend to save rather than spend |
| Short-Run Aggregate Supply Curve | Aggregate price level and aggregate output supplied in the short run "Short-run" because production costs can be assumed to be fixed. |
| Short-Run Aggregate Supply Shift | Shift to the right of the short-run aggregate supply curve: prices, fall, income increases, nominal wages go down, sometimes productivity increases Shift to the left of the SRAS curve: decreased income, higher prices, lower productivity |
| Long-run Aggregate Supply Curve | Similar to the short-run aggregate supply curve, but not effected by short-run factors, but by long-term economic growth determinants |
| Recessionary and Inflationary Gaps | Recessionary: when actual output < potential output Inflationary Gap: when the potential output < actual output |
| T-Account | "A simple tool that summarizes a business's financial position by showing, in a single table, the business's assets and liabilities, with assets on the left and liabilities on the right." (Krugman glossary) |
| Embedded Liberalism | Requires open trade market system and that individual countries have autonomy in order to make economic decisions within that countries Part of the "Bretton Woods Era" |
| Post-Bretton Woods (Neoliberalism) | Reaganism & Thatcherism: anti-government spending Return to the idea that a market economy would fix its own problems and establish equilibrium (invisible hand, self-regularity) Washington Consensus 10 Commandments "Trickle-down economics" |
| Fiscal Policy | The use of taxes, government transfers/purchases in order to shift the aggregate demand curve Can be expansionary or contractionary |
| Social Insurance Programs | Government programs (transfer payments) intended to protect families against economic hardship (such as health insurance, social insurance, unemployment insurance) |
| Expansionary Fiscal Policy | Policies intended to increase aggregate demand Create fuel for economy in order to close the recessionary gap Implemented by government policies, government transfers: infusing government money into the economy |
| Contractionary Fiscal Policy | Policies intended to reduce aggregate demand Closes inflationary gap by reducing government spending (or implementing higher taxes) and reducing government transfers Brings economy back down to equilibrium |
| Multiplier Effect | The multiplier magnifies new spending into greater levels of income and output because each round of spending becomes income for someone else (GDP counted separately each time the same money changes hands) |
| Multiplier | Ratio of the change in real GDP caused by an autonomous change in aggregate spending to the size of that autonomous change |
| Types of Fiscal Policy (name the 2) | 1. Automatic Stabilizer 2. Discretionary Fiscal Policy |
| Automatic Stabilizer | Government spending and taxation rules which cause fiscal policy to be automatically expansionary when the economy contracts, and automatically contractionary when the economy expands |
| Discretionary Fiscal Policy | Fiscal policy which is the result of deliberate actions by policy makers Example: Obama stimulus |
| Budget Balance (and Surplus/Deficit) | Balanced budget: Government saving = tax revenues - government purchases - government transfers When there is a positive budget balance, there is a surplus (need for contractionary fiscal policy) When there is a negative budget balance, there is a deficit (need for expansionary fiscal policy) |
| Deficit vs Debt | Deficit: difference between the amount the government spends and the amount it receives over a given period Debt: sum owed by the government at a particular time *Related but not the same and they tell different stories |
| Implicit Liabilities | Spending promises made by governments which are effectively a debt, despite the fact that they are not included in usual debt statistics Example: pensions (as a promise of future payment) |
| Debt GDP Ratio | Measures the "health" of an economy Indicates potential taxes which governments could collect Dependant on increase or decrease of debt + GDP |
| Capital Flows | Capital flowing from one country to another |
| Balance of Payments | Sources of cash - uses of cash = net money Goal: net money at least balances out (otherwise there could be a deficit or surplus) For international transactions: Payments from foreigners - payments to foreigners = net money |
| Balance of Payments on Current Account | Transactions which don't create liabilities Current account = country's balance of payments on goods and services + net international transfer payments + factor income |
| Balance of Payments on Goods and Services | Difference between exports and imports in a given period |
| Merchandise Trade Balance | Difference between a country's exports and imports of goods; doesn't include services |
| Balance of Payments on Financial Account | Difference between sales of assets to foreigners and purchases of assets from foreigners during a given period |
| Gross National Product (GNP) | GDP + international factor income (money made abroad) |
| International Capital Flows | Capital flows from countries with more savings than their borrowers want, so they loan to the country where savings is less than what borrowers want Determined by political stability, growth rate |
| Exchange Rate | Prices at which currencies are traded in the foreign exchange market Can either appreciate or depreciate |
| Foreign Exchange Market | Based on international supply and demand (for US $) Based on exchange rates Equilibrium exchange rate shifts as supply/demand shifts |
| Real vs Nominal Exchange Rates | Real exchange rate: exchange rate adjusted for international difference in aggregate price levels Nominal exchange rate: the price of a currency as a value of a number of units of another currency |
| Purchasing Power Parity (PPP) | Economic theory that estimates exchange rate adjustments requried for the exchange to be equal to each currency's purchasing power Often based on the cost of "basket of goods" where the cost would be the sam in both countries being compared Example: Big Mac Index |
| Exchange Rate Policy (Fixed or Floating) | Governing policy for the exchange rates Fixed exchange rate: rate which is held at or near a particular target against some other currency (often US $) Floating exchange rate: rate which is allowed to fluctuate with the market |
| Exchange Market Intervention | Government buys or sells currency in the foreign exchange market IF a country wants to fix its exchange rate above equilibrium, it buys another currency and sells its own IF a country wants to fix its exchange rate below equilibrium, it must sell another currency and buy back its own |
| Foreign Exchange Reserve | Governments maintain stocks of foreign currency to buy their own currency on the foreign exchange market |
| International Business Cycle | One country's imports are another country's exports: creates a link between business cycles in different countries Floating exchange rates may weaken that link |
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