Glossary

accumulation:
Output which is not consumed, but is set aside for use in future production;
investment.

adaptive
expectations: Expectations about the future which are formed by examining
the recent past.

adjusted
R square: A goodness of fit measurement; measures the percent of the dependent
variable’s variation that is explained by movement of the independent variable
in a linear

regression.
Adjusted R square is similar to R square but is adjusted for the number of
independent variables.

base
year: The year that is used as a standard of comparison in a time series
index number, such as the CPI.

circular
flow: A schematic diagram that shows the sub-components of output and
the flow of incomes generated in production.

consumer
price index (CPI): A measure of the level of prices for final goods and
services purchased by the typical consumer household.

consumption:
The largest component of GDP when it is measured by adding up expenditures.

correlation:
A measure of linear association between two variables.

demand
side model: An economic model that focuses mainly on movements in aggregate
demand, and views them as the source of most of the variation in economic
activity.

depreciation:
The machines and other equipment that are worn out in the process of production.

deterministic
model: A model in which outcomes are precisely determined without any
room for random variation.

difference
in means test: A test of whether two different samples are drawn from
the same population; if they are, then differences in the sample averages
are not likely to be very great.

dividends:
Profit income earned by stockholders.

exports:
Goods and services produced in one country but sold in another.

final
goods and services: Goods and services that are consumed or used to produce
other goods and services.

financial
institutions: Businesses that pool the savings of households and make
them available to businesses that wish to borrow.

foreign
sector: Purchasers of our exports, suppliers of our imports.

Friedman,
Milton: Nobel prize winning conservative economist that argued against
Keynesian economics and helped to revitalize monetarism.

gross
domestic product (GDP): The market value of all final goods and services
produced inside a nation in a year.

GDP
deflator: The price index used to measure inflation in the price of goods
and services that make up GDP.

gross
national product (GNP): The market value of all final goods and services
produced with the factors of production owned by a nation in a year.

imports:
Goods and services made abroad and sold here.

income:
The flow of payments received for the supply of land, labor, and/or capital.

index
number: A number set equal to 100 in the base year, and used to measure
changes in prices or quantities.

indirect
business taxes: Taxes paid on goods, such as sales taxes, import tariffs
and excise taxes.

inflation:
The percentage change in the price index; a general rise in prices.

interest:
Income earned on money lent.

intermediate
goods and services: Goods and services used as inputs into the production
of other goods and services.

investment:
Accumulation; setting aside part of this period’s output in order to expand
the economy’s capacity to produce in the future.

Keynes, John
Maynard: The leading macro-economic theorist of the 20th century, Keynes
showed how governments could use their spending and taxing powers to combat
recessions.

labor
force: Residents of a nation that are 16 or older, non-institutionalized,
and either working or actively seeking work.

laissez
faire: Free market economics with a minimum of government intervention.

liquidity:
The ease with which an asset can be spent.

mean:
A measure of central tendency equal to the sum of all the observations divided
by the number of observations.

money:
M1 or M2; M1 is cash, coin, traveler’s checks and checking account balances;
M2 is M1 plus household savings accounts and money market accounts.

national
income: The sum of wages and salaries, interest income, rental income,
dividends and profit income.

national
income and product accounts (NIPA): The system used to record a nation’s
total output and income.

natural
rate of unemployment: The rate of unemployment which is associated with
a constant (unchanging) rate of inflation.

neoclassical
economics: The mainstream school of economics that tends to view the macroeconomy
has self equilibrating at the natural rate of unemployment.

neo-Keynesian
economics: The current day descendants of Keynes; neo-Keynesians tend
to view the economy as capable of getting stuck in recessions for prolonged
periods of time.

nominal
rate of interest: The rate charged by banks or other lenders; unadjusted
for inflation.

non-accelerating
inflation rate of unemployment (NAIRU): Another term for the natural rate
of unemployment.

null
hypothesis: The primary hypothesis being investigated; often it is an
hypothesis that there is no difference between two values, or that a sample
value is not different from zero.

Okun’s
Law: The "law" states that increases in economic growth are associated
with decreases in unemployment.

personal
investment: Purchase of financial assets such as stocks and bonds by a
household or individual.

Phillips
curve: The negative relationship between the change in the rate of inflation
and unemployment.

probabilistic
model: A model which allows for a random, probabilistic element in the
relationship between two or more variables.

producer
price index (PPI): An index number used to measure prices of the
intermediate and final goods and services that businesses buy.

p-value:
The probability of getting a particular value of a test statistic, or a larger
value, when the null hypothesis is true.

random
error term: A residual measure of the non-deterministic part of the relationship
between two or more variables at a particular point in time.

rational
expectations: The process of forming expectations about the future by
gathering all readily available information.

real
rate of interest: The inflation adjusted rate, equal to the nominal rate
minus the expected rate of inflation.

regression:
A statistical technique for estimating the best fitting line through a series
of data points in a scatter plot.

rent:
Income earned by the letting of land.

retained
profits: Profit income earned that is not paid out to stockholders.

R
square: A goodness of fit measure that tells the percent of the variation
in one variable that is explained by movement in another variable.

scatter
plot: A graph of pairs of values.

stagflation:
Recession (stagnation) plus inflation.

standard
error of the estimate: A measure of the accuracy of a sample statistic
such as a mean of a regression coefficient.

standard
deviation: A measure of dispersion which is a function of the sum of the
squared deviations of values from the mean. The standard deviation is calculated
as the square root of the variance.

stochastic
model: see probabilistic model.

stock
and flow variables: Variables which are measured at a point in time (stock)
or over a period of time (flow).

supply
side economics: The belief that taxes and regulations form such a large
burden on the economy that it significantly stifles economic growth.

transfer
payments: Payments received which are not in return for providing a goods
or service; transfer payments are a redistribution of income.

t-statistic:
A small sample test statistic which is based on the student’s t distribution;
as the sample gets large, the t statistic approaches the normal distribution.

unemployment:
Without a job and seeking work.

variance:
A measure of dispersion which is equal to the average of the square of the
deviations of variables from their mean.

wages
and salaries: income receive for the supply of labor.

wealth:
The accumulation of all past savings which have not been spent.