Consumption
spending by households on goods and services, with the exception of purchases of new housing
GDP Deflator
a measure of the price level calculated as the ratio of nominal GDP to real GDP times 100
Government Purchases
spending on goods and services by local, state, and federal governments
GDP
the market value of all final goods and services produced within a country in a given period of time
Investment
spending on capital equipment, inventories, and structures, including household purchases of new housing
Microeconomics
the study of how households and firms make decisions and how they interact in markets
Macroeconomics
The study of economy-wide phenomena, including inflation, unemployment, and economic growth
Net Exports
spending on domestically produced goods by foreigners (exports) minus spending on foreign goods by domestic residents (imports)
Nominal GDP
the production of goods and services valued at current prices
Real GDP
the production of goods and services valued at constant prices
Consumer Price Index
a measure of the overall cost of the goods and services bought by a typical consumer
Indexation
the automatic correction by law or contract of a dollar amount for the effects of inflation
Inflation Rate
the percentage change in the price index from the preceding period
Nominal Interest rate
the interest rate as usually reported without a correction for the effects of inflation
Producer Price Index
a measure of the cost of a basket of goods and services bought by firms
Real Interest Rate
the interest rate corrected for the effects of inflation
Catch-Up Effect
the property whereby countries that start off poor tend to grow more rapidly than countries that start off rich
Diminishing Returns
the property whereby the benefit from an extra unit of an input declines as the quantity of the input increases
Human Capital
the skills and knowledge gained by a worker through education and experience
Natural Resources
the inputs into the production of goods and services that are provided by nature, such as land, rivers, and mineral deposits
Physical Capital
the stock of equipment and structures that are used to produce goods and services
Productivity
the quantity of goods and services produced from each unit of labor input
Technological Knowledge
society's understanding of the best ways to produce goods and services
Bond
a certificate of indebtedness
Budget Deficit
a shortfall of tax revenue from government spending
Budget Surplus
an excess of government receipts over government spending
Crowding Out
a decrease in investment that results from government borrowing
Financial Intermediaries
financial institutions through which savers can indirectly provide funds to borrowers
Financial markets
financial institutions through which savers can directly provide funds to borrowers
Financial Systems
the group of institutions in the economy that help to match one person's saving with another person's investment
Market for Loanable Funds
the market in which those who want to save supply funds and those who want to borrow to invest demand funds
Mutual Fund
an institution that sells shares to the public and uses the proceeds to buy a portfolio of stocks and bonds
National Saving
the total income in the economy that remains after paying for consumption and government purchases
Private Saving
the income that households have left after paying for taxes and consumption
Public Saving
The tax revenue that the government has left after paying for its spending
Stock
a claim to partial ownership in a firm
Compounding
The accumulation of a sum of money in, say, a bank account, where the interest earned remains in the account to earn additional interest in the future
Diversification
The reduction of risk achieved by replacing a single risk with a large number of smaller, unrelated risks
Efficient Market Hypothesis
The theory that asset prices reflect all publicly available information about the value of the asset
Finance
The field that studies how people make decisions regarding the allocation of resources over time and the handling of risk
Firm-Specific RIsk
Risk that affects only a single company
Fundamental Analysis
The study of a company's accounting statements and future prospects to determine its value
Future Value
The amount of money in the future that an amount of money today will yield, given prevailing interest rates
Informational Efficiency
The description of asset prices that rationally reflect all available information
Market Risk
Risk that affects all companies in the stock market
Present Value
The amount of money today that would be needed, using prevailing interest rates, to produce a given future amount of money
Random Walk
The path of a variable whose changes are impossible to predict
Risk Aversion
A dislike of uncertainty
Appreciation
an increase in the value of a currency as measured by the amount of foreign currency it can buy
Balanced Trade
a situation in which exports equal imports
Closed Economy
an economy that does not interact with other economies in the world
Depreciation
a decrease in the value of a currency as measured by the amount of foreign currency it can buy
Exports
goods produced domestically and sold abroad
Imports
goods produced abroad and sold domestically
Net Capital Outflow
the purchase of foreign assets by domestic residents minus the purchase of domestic assets by foreigners
Net Exports
spending on domestically produced goods by foreigners (exports) minus spending on foreign goods by domestic residents (imports)
Nominal Exchange Rate
the rate at which a person can trade the currency of one country for the currency of another
Open Economy
an economy that interacts freely with other economies around the world
Purchasing Power Parity
a theory of exchange rates whereby a unit of any given currency should be able to buy the same quantity of goods in all countries
Real Exchange Rate
the rate at which a person can trade the goods and services of one country for the goods and services of another
Trade Balance
the value of a nation's exports minus the value of its imports; also called net exports
Trade Deficit
an excess of imports over exports
Trade Surplus
an excess of exports over imports