Homework 1: Definitions and Examples

1. Aggregate Demand Relation

Total demand for goods and services in the economy from within and outside its borders.


Example

As Price level drops national income and/or quantity of output increases.


Reference:

1. http://fxtrade.oanda.com/help/glossary/glossaryA_C.html
2. http://www.sparknotes.com/economics/macro/aggregatedemand/section2.rhtml

2. Animal Spirits

According to Keynes, these are “spontaneous urges to action rather than inaction” and are the driving force behind investments.

An example of this is that entrepreneurs often put aside the thought of failure when setting up a business and just go ahead even if it may seem irrational.

Reference:
1. Matthews, R. C. O. (1984): Animal spirits, Proceedings of the British Academy, 70, 209-229.

3. Bank Run

This can be defined as the concerted action of depositors who try to withdraw their money from a bank because the think it will fail.

Example
During the Economic Crisis in Argentina, there was a massive bank run when the people feared that they would lose their money and they withdrew huge amounts until the accounts were frozen.

Reference:
1. http://wordnet.princeton.edu/perl/webwn

4. Bond

A bond is a debt security, in which the authorized issuer owes the holders a debt and is obliged to repay the principal and interest (the coupon) at a later date, termed maturity.

Example
US Treasury Bond, which is a bond issued by the US Government to raise money for different operations and expenses. Its maturity can be from 10 to 30 years and has a fixed interest rate.

Reference:
1. Wikipedia; http://en.wikipedia.org/wiki/Bond_%28finance%29
2. http://www.investorglossary.com/us-treasury-bond.htm

5. Capital Account

The net of investment flowing in and out of a country.

Example
In Greece, say that foreigners invest 1 billion Euro in that country (capital inflow) and at the same time Greek investors invest 400 million Euro abroad (capital outflow). These investments include all assets such as companies, property, stocks and bonds and holdings in loans, bank accounts and currencies. In this example the capital account would record all these transactions and would have a balance of 600 million Euro (1 billion – 400 million).

Reference:
1. http://fxtrade.oanda.com/help/glossary/glossaryA_C.html

6. Debt to GDP ratio

This is a measure of a country's federal debt in relation to its gross domestic product (GDP) which indicates the country's ability to pay back its debt.
http://www.investopedia.com/terms/d/debtgdpratio.asp

Example
Reflecting both the stability of the Debt and the rapid growth of the Irish economy in recent years, the Debt GDP ratio has fallen from over 90% during the first half of the 1990s to an estimated 25.1% at end 2007. This can be seen in the table below.



Reference:
1. http://www.ntma.ie/NationalDebt/debtGDP.php

7. Effective Demand

A qualifying term meaning the ability to pay as well as desire to buy.

Example
If a new product comes out that is highly desired by the population there will be a high demand for it, however, if half the population cannot afford it due to it being too expensive then the effective demand will be only by half of the population.

Reference:
1. http://www.google.com/url?sa=X&start=0&oi=define&q=http://www.alpineescrow.net/terms.htm&usg=AFQjCNEMX8EjjspeIP7Wssnf7kZqz9f0yw

8. Deflation

Deflation is the opposite of inflation. It is a decrease in the general price level of goods and services over a period of time. During deflation, while consumers can buy more with the same amount of money, they also have less access to money, as jobs and wages are dictated by returns on the sale of products and services.

A notable example of deflation was when Japan experienced a period of deflation in the late 90s and early part of the 2000s.

Reference:
1. Wikipedia; http://en.wikipedia.org/wiki/Deflation
2. Japanese Statistics Bureau, Ministry of Internal Affairs and Communications; http://www.stat.go.jp/english/data/cpi/index.htm


9. Consumption Function


The consumption function calculates the amount of total consumption in an economy. It is made up of autonomous consumption that is not influenced by current income and induced consumption that is influenced by the economy's income level.


The simple consumption function is shown as the linear function:

C = c0 + c1Yd

where C = total consumption, c0 = autonomous consumption, c1 = the marginal propensity to consume, and Yd = disposable income (income after taxes and transfer payments). The second term (c1Yd) is induced consumption.


Reference:
1. Wikipedia; http://en.wikipedia.org/wiki/Consumption_function
2. Macroeconomics, Olivier Blanchard, page 44


10. Consumer Price Index


A consumer price index (CPI) is a measure of the average price of consumer goods and services purchased by households. The percent change in the CPI is a measure of inflation.
Irelands CPI has remained positive and in the single digits for approximately 20 years. In the 70s and 80s it reached levels as high as 20%. During this period Ireland’s economy suffered from high unemployment and slow growth.

Reference:
1. Wikipedia; http://en.wikipedia.org/wiki/Consumer_Price_Index
2. Central Statistics Office Ireland; http://www.cso.ie/statistics/conpriceindex.htm

11. Investment Function

Also known as the Keynesian investment function, it accounts for the fact that with an excess supply of goods, producers cut back on their stocks of capital and hence there is generally less investment demand. It includes the level of output and is similar to the consumption function.

Reference:

1. Macroeconomics, Robert J. Barro, page 772

12. Fiscal Expansion

An increase in the deficit, either due to an increase in government spending or to a decrease in taxes is called a fiscal expansion.

Reference:

1. Macroeconomics, Olivier Blanchard, page 87

13. GDP Deflator

The GDP Deflator is a measure of the change in prices of all new, domestically produced, goods and services in an economy.

It is similar to Consumer Price Index but differs in that is it not based on a fixed basket of goods and services. The basket changes with consumers consumption and investment patterns, i.e. as consumers expenditure patterns or choices change due to changing prices the GDP Deflator will accommodate for this.

For example, if the price of product A increases relative to product B and people spend more money on product B as a substitute to product A, a consumer price index will not take this into account while a GDP Deflator will. Without this the GDP figure may underestimate the degree to which improving technology and quality-level are increasing the real standard of living.

Reference:

1. Wikipedia; http://en.wikipedia.org/wiki/GDP_Deflator
2. Wikipedia; http://en.wikipedia.org/wiki/Gross_domestic_product

14. Imports

Imports are goods or services that are purchased in a country that were not produced in said country. Without imports, nations would be limited to the goods ands services produced within their own borders.

An example of an import is a …. banana! (in Ireland)

15. Monetary contraction

Monetary contraction is a monetary policy that seeks to reduce the size of the money supply.

Source: http://en.wikipedia.org/wiki/Contractionary_monetary_policy

16. Nominal GDP

Nominal GDP reflects Gross Domestic Product in today’s prices.
For example, if today’s Nominal GDP is $105billion, and the GDP Deflator is 3%, the Real GDP is $105B/1.05, or $100billion.

Source: http://www.fxwords.com/n/nominal-gdp.html

17. Propensity to consume

The ratio of total consumption to total income is known as the average propensity to consume. An increase in consumption caused by an addition to income divided by that increase in disposable income (income after taxes and transfers) is known as the marginal propensity to consume.

For example, if Tom earns one extra Euro of disposable income, and the marginal propensity to consume is 0.4, then he will spend €0.4 and save €0.6 of that Euro.

Source: http://www.britannica.com/eb/article-9061553/propensity-to-consume


18. Short run

In economics, the concept of the short-run refers to the decision-making time frame of a firm in which at least one factor of production is fixed.

Source: http://en.wikipedia.org/wiki/Short-run

19. Real exchange rate

The real exchange rate (RER) is defined as , where P is the domestic price level and P * the foreign price level. P and P * must have the same arbitrary value in some chosen base year. e is the nominal exchange rate, which is the price in domestic currency of one unit of a foreign currency.

Source: http://en.wikipedia.org/wiki/Exchange_rate

20. Trade surplus

A positive balance of trade is known as a trade surplus and consists of exporting more than is imported. The balance of trade is the difference between the monetary value of exports and imports in an economy over a certain period of time.

For example, in 2007, Chinese exports were $1.2 trillion, while imports were $955.8 billion. Therefore, the trade surplus was $244.2billion.

Source: http://en.wikipedia.org/wiki/Trade_surplus