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Essential Glossary of Macroeconomics Terms


  1. The Accelerator A parameter that defines the relationship between national income and required capital stock.
  2. An Asset- Anything of value owned by an individual, institution or economic agent.
  3. Autonomous Expenditure- Expenditure that takes place independent of national income.
  4. A Bond- A long term (10+ years) debt instrument.
  5. Business Inventories- Additions or deletions to existing inventory levels in response to economic conditions (a flow variable).
  6. Business Cycle- An economic contraction (recession) followed by an expansion.
  7. Capital Gain- A positive difference between the sale price of an asset and its purchase price.
  8. Capital Loss – A negative difference between the sale price of an asset and its purchase price.
  9. Constant Returns to Scale (CRS)- A long run production concept where a doubling of all factor inputs exactly doubles the amount of output.
  10. Consumer- An economic agent that desires to purchase goods and services with the goal of maximizing the satisfaction (utility) from consumption of those goods and services.
  11. Consumer Price Index (CPI)- A weighted average of the prices of a representative market basket of goods and services that represents consumption patterns in some base time period.
  12. Cyclical Unemployment- Changes in unemployment attributed to cyclical behavior in economic activity.
  13. Deflation- A decline in the aggregate price level over some defined time period.
  14. Demand- A relationship between market price and quantities of goods and services purchased in a given period of time.
  15. Depreciation- A measure of the wear and tear that affects capital equipment or other intermediate goods.
  16. Diminishing Marginal Productivity (DMP)- A short run production concept where increases in the variable factor of production lead to less and less additional output.
  17. Direct Finance- The transfer of loanable funds through the use of capital markets (i.e., the Stock and Bond markets) usually facilitated by investment banks.
  18. Disinflation- A decline in the overall rate of inflation. Prices are still rising but by a smaller amount relative to previous time periods.
  19. Disintermediation- The removal of funds from a financial intermediary (a bank or other depository institution).
  20. Disposable Personal Income- Personal Income less taxes paid.
  21. Durable Goods- Goods that deliver consumption services over an extended period of time.
  22. Economic Expansion- Growth in Real GDP for one fiscal quarter or more.
  23. Economics- The study of how a given society allocates scarce resources to meet (or satisfy) the unlimited wants and need of its members.
  24. Employment- A measure of those individuals in the labor force working, at least one hour per week, for pay.
  25. Equilibrium- A situation where there is no tendency for change.
  26. Exchange Rate- The value of a domestic currency expressed in terms of a foreign currency or basket of foreign currencies.
  27. Factors of Production- An exhaustive list of inputs required for any type of production.
  28. Financial Intermediation- A form of indirect finance where an institution (a bank) acts as an intermediary to reduce transactions costs and facilitate borrowing and lending.
  29. Final Goods and Services- Goods and services that are purchased for direct consumption.
  30. Fixed nonresidential Investment- Additions to the existing stock of plant and equipment used in the production of goods and services.
  31. Fixed Residential Investment- Additions to the existing stock of housing used to provide housing services.
  32. Flow Variable- A variable that is measured per unit of time..
  33. Frictional Unemployment- Unemployment that exists as a natural consequence of market activity where individuals are in-between jobs.
  34. GDP- Gross Domestic Product: The market value of all final goods and services produced in a given time period.
  35. Gross Investment- Investment that includes additions to the capital stock as well a the replacement of depreciated capital.
  36. Human Capital/Wealth- A measure of the skills, ability or productivity of human beings.
  37. Implicit Price Deflator (IPD)- The ratio between Nominal GDP and Real GDP.
  38. Income Producing Asset- An asset that is used to generate revenue from the production and sale of goods and services.
  39. Indirect Business Taxes- Taxes that tend to be built into the price of a particular good (i.e., excise taxes).
  40. Income Taxes- Taxes that are based on and vary with personal or corporate income.
  41. Indirect Finance- The transfer of loanable funds (deposits) through the use of financial intermediaries (commercial banks).
  42. Induced Expenditure- Changes in spending due to changes in (national) income. See the Marginal Propensity to Spend.
  43. Inflation- An increase in the price level over some defined time period.
  44. Interest Sensitivity of Investment- A measure of responsiveness of investment expenditure to changes to the (real) interest rate.
  45. Interest Sensitivity of Money Demand- A measure of responsiveness of the demand for cash balances to changes in the (nominal) interest rate.
  46. Intermediate Goods and Services- Goods (or services) used to produce other goods (i.e., capital equipment).
  47. Investment- Changes to the existing capital stock or business inventories.
  48. Labor Force Participation Rate- The ratio of those in the labor force (the employed and unemployed) and those that are available for work.
  49. Laspeyres Index-  A weighted average of prices based on the use of base-period consumption patterns. Also known as the Consumer Price Index (CPI).
  50. Liquidity- A measure of the ease by which a financial asset can be converted into a form readily accepted as payment for goods and services.
  51. Liquidity Premium- An adjustment to a real interest rate to compensate for the direct relationship between uncertainty and the duration of a debt contract.
  52. M1 A narrow money supply measure that includes currency in circulation and the value of demand deposits.
  53. M2 A broad money supply measure that includes currency, demand deposits, and the value of time deposits.
  54. Marginal Propensity to Consume- The fraction of each additional dollar of income devoted to consumption expenditure.
  55. Marginal Propensity to Spend- The fraction of each additional dollar of income devoted to any type of spending (i.e., consumption, investment, government, or net exports).
  56. Market- A place or institution where buyers and sellers come together and exchange factor inputs or final goods and services. A market is one of several types of economic rationing systems.
  57. Money Market Instrument- A short term (less than 10 years) debt instrument.
  58. Money Multiplier- The relationship between changes in the monetary base and the money supply.
  59. Monetary Base- Also known as High-powered Money. Reserves + Currency in the monetary system — the main liabilities of the central bank.
  60. National Income – The sum of all types of income (wages, net interest, profits, and net rental income) earned in a given time period by any type of economic agent (individuals or corporation).
  61. Natural Rate of Unemployment- That rate of unemployment where there is neither upward nor downward pressure on prices.
  62. Net Investment- Investment exclusive of replacement of depreciated capital.
  63. Nominal GDP- GDP measured at current prices.
  64. Nominal Interest Rate – The interest rate published as part of a debt contract.
  65. Non-Durable Goods- Goods that tend to be immediately consumed or deliver consumption services over a short period of time.
  66. Non-Income Producing Asset- Something of value that does not generate any income or revenue stream.
  67. Normal (Current) Yield-  The ratio between the annual income generated by an asset and its purchase price. Also known as the present value of a perpetuity.
  68. Paasche Index – A weighted average of prices based on current expenditure patterns. Also known as the GDP (or Implicit Price) Deflator.
  69. Peak- A point of transition in the business cycle from expansion to contraction.
  70. Permanent Income – Expected levels of individual income that guide consumption expenditure decisions.
  71. Personal Income – The income earned by individual households in a given time period.
  72. The Phillips Curve- A theoretical relationship between the unemployment rate of a given economy and rates of (wage) inflation.
  73. Potential Output- A measure of the economy’s ability to produce goods and services.
  74. Present Value- The value of a future payment or stream of payments discounted by some appropriate rate of interest.
  75. Primary Stock/Bond Market The market where new shares of stock or new bonds are bought and sold. Activity in this market represents direct finance where actual borrowing and lending activity takes place.
  76. Producer- An economic agent that converts inputs (factors of production) into output (goods and services) with the goal of maximizing profits from production and sale of those goods and services.
  77. Profits- The difference between sales revenue and the costs of production..
  78. The Quantity Equation- Also known as the Equation of Exchange, an identity relating the amount of money in circulation to the price level and level of output in an aggregate economy.
  79. Rate of Time Preference- The equivalent of a personal interest (or discount) rate. The measure by which individuals compare current and future economic activity.
  80. Real GDP- GDP measured at constant (some base period) prices.
  81. Real Interest Rate- An interest rate that has been adjusted for changes in the price level or changes in purchasing power over some time period.
  82. Recession- Negative growth in Real GDP for two or more fiscal quarters.
  83. Relative Price- A ratio of any two prices or one particular price compared to a price index.
  84. Risk- A measure of uncertainty about the value of an asset or the benefits of some economic activity.
  85. Risk Premium- An adjustment to a real interest rate to compensate for uncertainty in the ability of a borrower to service a loan.
  86. Savings- The difference between income and expenditure in the current time period.
  87. Scarcity- A physical or economic condition where the quantity desired of a good or service exceeds the availability of that good or service in the absence of a rationing system.
  88. Stagnation- An economic condition where an economy is facing relatively high rates of inflation, little or no growth, and high unemployment.
  89. Secondary Stock/Bond Market- The market where existing shares of stock or existing bonds are traded. This market provides liquidity to these types of financial assets.
  90. A Share of Stock- A financial instrument that give the holder a share of ownership in a publicly held corporation.
  91. Shortage- A market condition where the quantity demanded of a particular good or service exceed the quantity available.
  92. Speculation- The purchase of a good or asset not intended for final consumption but rather in the expectation of future sale at some higher price.
  93. Spending Multiplier- The relationship between an autonomous spending shock and eventual changes in aggregate income.
  94. Standard of Living- The ratio of the output of an economy and population. Also known as per-capita output.
  95. Stock Variable- A variable measured at point in time.
  96. Structural Unemployment- Unemployment that exists as a consequence of structural changes in economic activity.
  97. Supply- A relationship between market price and quantities of goods and services made available for sale in a given period of time.
  98. Surplus- A market condition where the quantity supplied exceeds the quantity demanded.
  99. Transitory Income- Unexpected changes or shocks to individual income. Often measured as the difference between observed income and permanent income.
  100. Trough- A point of transition in the business cycle from contraction to expansion.
  101. Unemployment- The difference between the number of people in the labor force and those working for pay.
  102. Utility- A measure of the satisfaction received from some type of economic activity (i.e., consumption of goods and services or the sale of factor services).
  103. Velocity- The number of times a given quantity (stock) of money changes hands in a given time period (the ratio of expenditure in that time period to a given measure of the money supply).
  104. Yield- The ratio between the flow of returns (income, revenue, profits) generated by an asset and the purchase price of that asset.