Positive Externalities- Third Parties benefit from the production or consumption of goods and services Real World Example: Medicine Negative Externalities- Third parties bear spillover costs of the production or consumption of goods and services. Real World Example: Substances like alcohol, tobacco, etc
Gross Domestic Product: is the total money value of all final goods and services produced in an economy in one year. Gross National Product: is the total money value of all final goods and services produced in an economy in one year, plus net property income from abroad. Nominal GDP: not adjusted for inflation Real GDP: adjusted for inflation
Per Capita GDP: is the total money value of all final goods and services produced in an economy in one year per head of the population. Aggregate Demand: is the total spending in an economy consisting of consumption, investment, government expenditure and net exports Consumption: is spending by households on consumer goods and services over a period of time. Real world example: eating dinner outside everyday
Inflationary Gap: is the situation where total spending is greater than the full employment level of output, thus causing inflation
Deflationary Gap: is the situation where total spending is less than the full employment level of output, thus causing unemployment.
Demand-side policies: are any government policies designed to influence AD in the economy, thus affecting the average price level and real national output. Real World Example: Tax on income Fiscal Policy: is a policy using changes in government spending and/or direct taxation to achieve economic objectives. (Increase spending on education) Monetary Policy: is a policy using changes in money supply or interest rates to achieve economic objectives. (raising borrowing cost)
Aggregate Supply: is the total amount of domestic goods and services supplied by business and the government, including both consumer goods and capital goods. Supply-side policies: are government policies designed to shift the LRAS curve to the right, thus increasing potential output in the economy. Real World Example: increasing subsidies
Multiplier: is the ratio of a change in the level of national income to an initial change in one or more of the injections into the circular flow of income Accelerator: is the relationship between the level of induced investment and the rate of change of national income Crowding out: is the situation where the government spends more than it receives in revenue (Greece)
Unemployment: is a situation that exists when people who are willing and able to work cannot get a job. Full Employment: exists when the number of jobs available in an economy is equal to or greater than the number of the people actively seeking work. Underemployment: exists when workers are carrying out jobs for which they are over-qualified, not using their full skills or part time
Unemployment Rate: is the number of unemployed workers expressed as a percentage of the total workforce. Real World Example: Korea has 3.4% Structural Unemployment: is when in the long term, the pattern of demand and production methods change and there is a permanent fall in the demand for a particular type of labor. Frictional Unemployment: is unemployment that exists when people have left a job and are in the process of searching
Seasonal Unemployment: is unemployment that exists when people are out of work because their usual job is out of season Real World Example: Ski Instructor in Summer. Inflation: is a sustained increase in the general level of prices and a fall in the value of money
Demand-pull Inflation: is inflation that is caused by increasing AD in an economy that shifts the AD curve to the right
Cost-push Inflation: is inflation that is caused by an increase in the costs of production in an economy that shifts the SRAS curve to the left.
Deflation: is a persistent fall in the average level of prices in an economy Real World Example: Deflation in Japan slowing its economy.
Phillips Curve: is a curve showing the inverse relationship between the rate of unemployment and the rate of inflation, which suggests a trade-off between inflation and unemployment (short-run). In the long run, it shows the neo-classical view that there is no trade-off between inflation and unemployment in the long run and that there exists a natural rate of unemployment that can only be affected by supply-side policies.