Macroeconomics

Automatic stabilizer: Any government programme or policy that will counteract the business cycle without any new government action.

Autonomous spending: part of planned demand for goods that does not depend on current income.

Aggregate production function: relation between the quantity of aggregate output produced and the quantities of inputs used in production.

�Aggregate output: Total amount of output produced in the economy.

Aggregate price level: The average price of goods and services in an economy, usually captured by some index.

Crowding out: o?setting of a change in government expenditures by a change in private expenditures in the opposite direction due to higher interest rates caused by government borrowing.

Gross domestic product (GDP): sum of values of all final goods and services produced within the geographical limit of a country.

Gross National Product (GNP): The sum of values of all final goods and services produced by the citizens of a country within the country and the rest of the world. Gross National Product (GNP) = Gross Domestic Product (GDP) + Net Factor Income from Abroad (NFIA)

Gross domestic product at market price (GDPMP): While deriving GDP of a country we estimate value added at the market prices. Estimate of GDP obtained this way is known as GDP at market price.

Gross National Product at Factor Cost (GNPFC): Market prices normally include indirect taxes net of subsidies. Gross national product at factor cost {GNPFC) is simply, Gross national product at market price (GNPMP) minus net indirect taxes (Net IT), i.e. GNPFC = GNPMP � Net IT

Net National Product (NNP): Net National Product (NNP) is simply obtained as gross national product (GNP) minus depreciation (D), i.e.

Net National Product (NNP) = Gross National Product (NDP) � Total Depreciation (D).

Fixed capitals have their own life-time and depreciates in value every period of time after their participation in the productive process. Depreciation of fixed capital takes place because of their normal �wear and tear�.

National income (NI): Net national product at factor cost is equivalent to the notion of national income {NI), which the accrual of income to all normal residents in a country due to their participation in production anywhere in the world. Therefore, National Income (NI) = NNPFC

GDP Deflator: The GDP deflator, also called the implicit price deflator for GDP, is defined as the ratio of nominal GDP to real GDP:

GDP Deator = (Nominal GDP/ Real GDP)

Nominal GDP measures the value of the output of the economy at current prices. Real GDP measures output valued at constant prices. The GDP deflator measures the price of output relative to its price in the base year.

Aggregate demand shock: Shocks such as change in government expenditure or change in money supply that cause a change in aggregate demand in an economy.

Aggregate supply shock: Shocks such as increase in petroleum price, a drought etc. that lead to a change in aggregate supply in an economy.

Phillips Curve: Two goals of economic policymakers are low inflation and low unemployment, but often these goals conflict. Suppose, for instance, that policymakers were to use monetary or fiscal policy to expand aggregate demand policy would lead to higher output and a higher price level. Higher output means lower unemployment, because firms need more workers when they produce more. A higher price level means higher inflation.

Thus, when policymakers move the economy up, they reduce the unemployment rate and raise the inflation rate. Conversely, when they contract aggregate demand and move the economy down, unemployment rises and inflation falls. This tradeo? between inflation and unemployment, called the Phillips curve. Phillips curve is named after New Zealand�born economist

W. Phillips. In 1958 Phillips observed a negative relationship between the unemployment rate and the rate of wage inflation in data for the United Kingdom.

Depreciation: reduction in value of asset through wear and tear. Also, fall in the value of a currency in terms of another currency.

Rational expectations: Expectations about the future making best use of available information.

E?ciency wage: Modern-sector urban employers sometimes pay a higher wage than the equilibrium wage rate in order to attract a higher-quality work-force or to obtain higher productivity on the job.

Internal rate of return: Discount rate that causes a project to have a net present value of zero discount rate is compared with market rates of interest.

Keynesian model: Model developed by Lord John Maynard Keynes in the early 1930s to explain the cause of economic depression and hence the unemployment of that period. e model states that unemployment is caused by insufficient aggregate demand and can be eliminated by increasing government expenditure. Increase in aggregate demand would lead to increase in production and hence create further employment.

Laissez-faire: Free-enterprise market economy without any government intervention.

Macroeconomic instability: When an economy is passing through a phase with high inflation accompanied by rising budget and trade deficits and a rapidly expanding money supply.

Macroeconomic stabilization: Policies designed to eliminate macroeconomic instability.

Okun�s Law: Okun�s law says that a change of 1 percentage point in the unemployment rate translates into a change of 2 percentage points in GDP. Therefore, reducing inflation by 1 percentage point requires about 2.5 percentage points of cyclical unemployment.

Pro-cyclical fiscal policy: Changes in government spending and taxes that increase the cyclical fluctuations in the economy instead of reducing them.

Natural rate of unemployment: The average rate of unemployment around which the economy fluctuates. The natural rate is the rate of unemployment toward which the economy gravitates in the long run, given all the labour-market imperfections that impede workers from instantly finding jobs.

Recession: A recession is a decline in a country�s gross domestic product growth for two or more consecutive quarters of a year.

Sacrifice Ratio: Sacrifice ratio, is the percentage of a year�s real GDP that must be forgone to reduce inflation by 1 percentage point. A typical estimate is about 5: for every percentage point that inflation is to fall, 5 per cent of one year�s GDP must be sacrificed.

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