STUDY GUIDE CORE ECONOMICS
,PBL 1 and 2
Unit 1
GDP (Gross domestic product) per A measure of the market value of the output of the economy in a given period
capita (average income), includes goods and services produced by the government
estimates living standards
Disposable income Income available after paying taxes and receiving transfers from the
government, does not include goods and services produced by the government
Nominal GDP Includes the current prices of goods and services
Real GDP/GDP at constant prices Corrected with price changes
Constant prices Prices corrected for increase in prices (inflation) or decrease in prices (deflation)
so that a unit of currency represents the same buying power in different
periods of time
Purchasing Power Parity (PPP) A statistical correction allowing comparisons of the amount of goods and
services people buy in different countries that have different currencies
Growth rate (new-old)/oldx100%
Ratio scale Used for comparing growth rates
Industrial Revolution A wave of technological advances and organizational changes starting in Britain
in the 18th century, which transformed an agrarian and craft-based economy
into a commercial and industrial economy
Technology A process taking a set of materials and other inputs, including the work of
people and machines, to produce an output. Uses inputs to produce output
Technological progress A change in technology that reduces the amount of resources (Labour,
machines, land, energy, time) required to produce a given amount of the
output
Economy and environment Economy Society Biosphere environment
Kink in hockey-stick GDP per capita, productivity of labour, connectivity of world, impact of
economy on the global environment
Capitalism An economic system in which private property, markets and firms play an
important role
Private property Private property ownership rights over possessions (other than the
government)
Type: Capital goods
Markets A way for people to exchange products and services for their mutual benefit
through a process of buying and selling. unintended cooperation on a global
scale allowed specializing in comparative advantage
- Are reciprocated transfers
- Voluntary
- Usually there is competition
Firms Firms Business organization that uses inputs to produce outputs and set
prices to at least cover production costs.
- One or more individuals own a set of capital goods used in production
- They pay wages and salaries to employees
- They direct the employees in the production of goods and services
- The goods and services are the property of the owners
- Owners sell private property on markets with intention to make profit
Institutions The laws and social customs governing the way people interact in society
Capital goods The equipment, buildings, and other durable inputs used in producing goods
and services, including (if applicable) patents or other intellectual property
Intermediate inputs Raw materials used in production
Labour market Employers offer wages to employees who may agree to work under their
direction. Employers Demand side, Employees Supply side
Demand side The side of a market on which those participating are offering money in return
for some goods or services.
Supply side The side of a market on which those participating are offering something in
return for money
Ownership The right to use and exclude others from the use of something, and the right to
, sell the thing that is owned.
Economies of scale These occur when doubling all the inputs to a production process more than
doubles the output. The shape of a firm’s long-run average cost curve depends
both on returns to scale in production and the effect of scale on the prices it
pays for its input.
Absolute advantage A person or country has this in the production of a good if the inputs it uses to
produce this good are less than in some other person or country.
Comparative advantage (least A person or country has comparative advantage in the production of a
disadvantaged) particular good, if the cost of producing an additional unit of that good relative
to the cost of producing another good is lower than another person or
country’s cost to produce the same two goods.
Causal A direction from cause to effect, establishing that a change in one variable
produces a change in another.
Developmental state A government that takes a leading role in promoting the process of economic
development through public policies
Less dynamics in capitalism Private property is not secure, markets are not competitive, firms are owned by
people who survive because of their privileges, government laws and
policies
Monopolies/ market with one seller A firm that is the only seller of a product without close substitutes.
Too big to fail Said to be a characteristic of large banks, whose central importance in the
economy ensures they will be saved by the government if they are in financial
difficulty. will take bigger risks moral hazard
More dynamics in 1.Private incentives for cost-reducing innovation (derives from competition and
capitalism/conditions for capitalist secure private property)
revolution 2.firms led by those with proven ability to produce goods at low costs
3. public policy supporting these conditions (also supplies goods and services
for public needs)
4. A stable society, biophysical environment and resource base
Capitalist revolution Rapid improvements in technology combined with the emergence of a new
economic system
Political system Determines how governments will be selected, and how those governments
will make/implement decisions that affect all or most members of a population
Democracy A political system, that ideally gives equal political power to all citizens, defined
by individual rights such as freedom of speech, assembly, and the press; fair
elections in which virtually all adults are eligible to vote; and in which the
government leaves office if it loses.
Economics The study of how people (1) interact with each other and with their (3) natural
surroundings in (2) providing their livelihoods, and how this (4) changes over
time. Lecture: The study of scarcity, or of how people use resources and
respond to incentives or the study of decision making
Key concepts of economics 1.How we come to acquire the things that make up our livelihood: Things like
food, clothing, shelter, or free time.
2.How we interact with each other: Either as buyers and sellers, employees or
employers, citizens and public officials, parents, children/family members.
3.How we interact with our natural environment: From breathing, to extracting
raw materials from the earth.
4.How each of these changes over time.
Economic system An economic system is a way of organizing the production and distribution of
goods and services and the supply of money in an entire economy.
Specialization Specialization Increases productivity of labour because we become better at
producing things when we each focus on a limited range of activities.
o Learning by doing: We acquire skills as we produce things
o Difference in ability: Some people are better at producing things than
others (natural surrounding such as quality of soil)
o Economies of scale: Producing large number more cost-effective
o Only possible if they have a way to acquire the other goods they need.
Comparing self-sufficiency and specialization specialization more profitable
,Unit 17
Great depression The period of a sharp fall in output and employment in many countries in the
1930s
Global Financial Crisis 2007 collapse housing prices in US fall in prices of assets based on
subprime mortgages widespread uncertainty of solvency of banks in US and
Europe, which had borrowed to purchase such assets.
Golden age (of capitalism) The period of high productivity growth, high employment, low + stable inflation
Subprime borrowers An individual with a low credit rating and a high risk of default
Positive feedback (process) A process whereby some initial change sets in motion a process that magnifies
the initial change
Negative feedback (process) A process whereby some initial change sets in motion a process that dampens
the initial change.
Aggregate demand The total of the components of spending in the economy, added to get GDP
Y(income)=C (consumption)+I (investments) +G (government expenditure) +X
(export)-M (import) It is the total amount of demand for goods and services
produced in the economy.
Supply side (aggregate economy) How labour and capital are used to produce goods and services.
(Stagflation)
Demand side (aggregate economy) How spending decisions generate demand for goods s=and services, and as a
(great depression) result, employment and output. Uses multiplier model.
Great moderation Period of low volatility in aggregate output
Effective tax rate on profits New=after tax profit rate, old: before tax profit rate
Deflation Prices fell as unsold goods piled up on store shelves
Golden standard The system of fixed exchange rates, abandoned in the Great Depression, by
which the value of a currency was defined in terms of gold, for which the
currency could be exchanged
Zero lower bound This refers to the fact that the nominal interest rate cannot be negative, thus
setting a floor on the nominal interest rate that can be set by the central bank
at zero
New Deal US president Franklin Roosevelt’s program, begun in 1933, of emergency public
works and relief programs to employ millions. It established the basic structures
for modern state social welfare programs, labour policies and regulation
Bretton Woods system An international monetary system of fixed but adjustable exchange rates,
established at the end of the Second World War. It replaced the gold standard
that was abandoned during the Great Depression
Catch-up growth The process by which many (but far from all) economies in the world close the
gap between the world leader and their own economy.
Post-war accord An informal agreement (taking different forms in different countries) among
employers, governments, and trade unions that created the conditions for rapid
economic growth in advanced economies from the late 1940s to the early
1970s. Trade unions accepted the basis institutions of the capitalist economy
and did not resist technological change in return for low unemployment,
tolerance of unions and other rights, and a rise in real incomes that matched
rises in productivity
Stagflation Persistent high inflation with high unemployment in country’s economy.
Supply-side policies A set of economic policies designed to improve the functioning of the economy
by increasing productivity and international competitiveness, and by reducing
profits after taxes and costs of production.
Bank bailouts The government buys an equity stake in a bank or some other intervention to
prevent it from failing
Great recession The prolonged recession that followed the global financial crisis of 2008
Financial deregulation Policies allowing banks and other financial institutions greater freedom in the
types of financial assets they can sell, as well as other practices
Leverage ratio (banks/ household) The value of assets divided by the equity stake in those assets
Financial accelerator The mechanism through which firms’ and households’ ability to borrow
increases when the value of the collateral they have pledged to the lender
, (often a bank) goes up
Derivatives A financial instrument in the form of a contract that can be traded, whose value
is based on performance of underlying assets such as shares/ bonds/real estate
Collateralized debt obligation (CDO) A structured derivative consisting of a bond or note backed by a pool of fixed-
income assets. The collapse in the value of the instruments of this type that
were backed by subprime mortgage loans was a major factor in the financial
crisis of 2007-2008
Mortgage-backed security (MBS) A financial asset that uses mortgages as collateral. Investors receive payments
derived from the interest and principal of the underlying mortgages.
Credit rating agency Firm which collects information to calculate the credit-worthiness of individuals
or companies and sells the resulting rating for a fee to interested parties.
Subprime mortgages A residential mortgage issued to a high-risk borrower.
Hedge finance Financing used by firms to fulfil contractual payment obligations using cashflow
Speculative finance A strategy used by firms to meet payment commitments on liabilities using cash
flow, although the firm cannot repay the principal in this way. Firms in this
position need to ‘roll over’ their liabilities, usually by issuing new debt to meet
commitments on maturing debt.
Crisis An unusual but recurrent cataclysmic divergence from the normal-ups-and-
downs of the economy
Unit 2
Flows A quantity measured per unit of time, such as annual income or hourly wage.
Equilibrium A model outcome that is self-perpetuating. Something of interest does not
change unless an external force is introduced that alters the model’s
description of the situation
Subsistence level The level of living standards (measured by consumption or income) such that
the population will not grow or decline. (equilibrium, self-correcting
Four key ideas of economic Ceteris paribus, incentives, relative prices, economic rent
modelling
Ceteris paribus Assumption in economic models where the variables that you are NOT
focussing on are kept constant (we see more by looking at less)
Incentives Economic reward/punishment, which influences the benefits and costs of
alternative courses of action.
Relative prices The prices of one option relative to another (usually in ratio)
Economic rent =benefit from option The extra benefit you receive above what you would have received from the
taken(value)-economic cost next best alternative= reservation/fallback option (economic cost-enjoyment)
something you would like to get and not to pay.
Innovation rent When you can make more profit than your rival
Reservation option A person’s next best alternative among all options in a particular transaction
Economic cost Out-of-pocket cost + opportunity cost
Unit 3
Production function (mirror of The amount of output that can be produced by any given amount of
feasible frontier) combination of input(s). The function describes differing technologies capable
of producing the same thing.
Average product Total output/particular input.
Marginal product (slope production The additional amount of output that is produced if an input was increased by
function) one unit, while holding all other inputs constant.
Diminishing returns A situation in which the use of an additional unit of a factor of production
results in a smaller increase in output than the previous increase.
Concave function A function of two variables for which the line segment between any two points
on the function lies entirely below the curve representing the function (the
function is convex when the line segment lies above the function).
Tangency When two curves share one point in common but do not cross.
Rationality Making choices in order to maximize your utility
Preferences A description of the benefit or cost we associate with each possible outcome
Utility A numerical indicator of the value that one places on an outcome, such that
higher valued outcomes will be chosen over lower valued ones when both are
