Econ Midterm
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| Balance of payments | a detailed record of the composition of the current account balance and of the many transactions that finance it
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| Balance of payments accounts | keep track of both its payments to and its receipts from foreigners
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| Current account transactions | arise from the export or import of goods and services
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| Financial account transactions | arise from the purchase or sale of financial assets (money, stocks, bonds, factories, or government debt)
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| Capital account transactions | other activities resulting in transfers of wealth between countries
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| Double-entry bookkeeping rule | every international transaction automatically enters the balance of payments twice, once as a credit and once as a debit
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| The Fundamental Balance of Payments Identity | • CA + FA + CPA = 0 • CA + CPA = - FA
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| Goods trade | exports and imports of merchandise
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| Services | exports and imports of services (such as payments for legal assistance, tourists’ expenditures, shipping fees, financial advice, computer programming)
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| Income | made up mostly of international interest and dividend payments and the earnings of domestically owned firms operating abroad, wages that workers earn abroad, compensation for the services provided by foreign factors of production (capital, labor)
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| Net unilateral transfers | considered part of the current account as well as a part of national income
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| The Financial Account | Measures the difference between sales of assets to foreigners and purchases of assets located abroad
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| capital inflow (+) | When the Czech Republic borrows 1 CZK from foreigners, it is selling them an asset – a promise that they will be repaid 1 CZK, with interest, in the future
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| capital outflow (-) | When the Czech Republic lends abroad, however, a payment is made to foreigners and the financial account is debited
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| Official foreign exchange intervention | central banks often buy or sell international reserves in private asset markets to affect macroeconomic conditions in their economies
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| Official Reserve Transactions | • A way for the central bank to inject money into the economy or withdraw it from circulation • The bookkeeping offset to the balance of official reserve transactions is called the official settlements balance or the balance of payments
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| Gross national product | the value of all final goods and services produced by its factors of production and sold on the market in a given time period
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| Four possible uses for which a country’s output is purchased: | – Consumption (C), – Investment (I), – Government purchases (G), – Current account balance (CA)
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| National income accounts | a country’s income in fact equals its output
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| National Income | the income earned by country’s factors of production
GNP – depreciation + net unilateral transfers
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| Depreciation | the economic loss due to the tendency of capital (machinery and structures) to wear out as they are used
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| Net national product (NNP) | GNP – depreciation
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| Unilateral transfers | gifts from residents of foreign countries
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| Net unilateral transfers | part of a country’s income but are not part of its product (must be added to NNP)
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| Gross Domestic Product | measures the volume of production within the countries borders
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| Consumption | • The portion of GNP purchased by private households to fulfill current wants • The largest component of GNP in most economies
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| Investment | • used by private companies to produce future output • used to increase the nation’s stock of capital • Firms’ purchases of inventories also counted in investment spending • Usually more variable than consumption • Financial investment not included
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| Government Purchases | • Any goods and services purchased by federal, state, or local governments (military spending, research support, education, highways) • Include investment as well as consumption purchases • Transfer payments not included
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| Current account balance | the difference between exports and imports of goods and services, CA = EX – IM
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| National saving | the portion of output, Y, that is not devoted to household consumption, C, or government purchases, G, S = Y – C – G
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| Disposable income | national income, Y, less the taxes collected from households and firms by the government, T
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| Private saving | the part of disposable income that is saved rather than consumed, • Sp = Y – T – C
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| Microeconomics | – Focused on the behaviour of producers and consumers and its consequences – Concerned with the allocation of scarce resources among industries
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| Macroeconomics | – Focused on the behaviour of the economy as a whole – total output level, the general level of prices and the overall level of employment – global economy – Long-run growth – The Thrift Paradox – Focus on economic aggregates
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| Fiscal policy | – Control of government spending and taxation – Developed during and after the Great Depression
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| Monetary policy | – Control over interest rates and the quantity of money in circulation – Now used to manage the performance of the macroeconomy
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| Business cycle | short-run alternation between economic downturns and upturns (recessions and expansions)
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| Depression | very deep and prolonged downturn
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| Recession | two consecutive quarter-year periods in which the total value of output is falling
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| Unemployment | total number of people who are actively looking for work but aren’t currently employed
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| Employment | total number of people actively employed
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| Labour force | sum of employment and unemployment, doesn’t include discouraged workers
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| Discouraged workers | people who are capable of working but have given up looking for jobs because they don’t think they will find them
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| Unemployment rate | percentage of the total number of people in the labour force who are unemployed
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| Aggregate output | economy’s total production of final goods and services over a given time period • It excludes intermediate goods and services – produced as inputs for the production of other goods
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| Real GDP | actual numerical measure of aggregate output typically used by economists
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| Inflation | a rise in the general price level (often results from an excessively strong expansion) – another major economic concern
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| Stabilization policy | efforts undertaken to reduce the severity of recessions or to rein in excessively strong expansions
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| (Secular) Long-run growth | sustained upward trend in aggregate output over several decades
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| Long-run growth per capita | key to higher wages and a rising standard of living
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| Nominal | measure of something (wages) is a measure that has not been adjusted for changes in prices over time
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| Real | measure of something is a measure that has been adjusted for changes in prices over time
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| Inflation rate | annual percentage change in the aggregate price level
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| Open economy | trades in goods, services and assets with other countries
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| Closed economy | doesn’t trade with other countries
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| Exchange rate | value of one currency in terms of the other – Has an impact on the aggregate price level – Influences the trade balance
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| Capital flows | – international movements of financial assets – Allow some countries to spend more on additions to their productive capacity – leads to a higher standard of living, in the long run – Allow international investors to get a higher return on their savings
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