Margins Study Assistant

Chapter 1

Welcome to Economics!

Summary

Microeconomics and macroeconomics are two different perspectives on the economy. Economics seeks to solve the problem of scarcity, which is when human wants for goods and services exceed the available supply. Division and specialization of labor only work when individuals can purchase what they do not produce in markets. A modern economy displays a division of labor, in which people earn income by specializing in what they produce and then use that income to purchase the products they need or want.

Key terms

economics: the study of how humans make choices under conditions of scarcity
specialization: when workers or firms focus on particular tasks for which they are well-suited within the overall production process
microeconomics: the branch of economics that focuses on actions of particular agents within the economy, like households, workers, and business firms
macroeconomics: the branch of economics that focuses on broad issues such as growth, unemployment, inflation, and trade balance
division of labor: the way in which different workers divide required tasks to produce a good or service
market: interaction between potential buyers and sellers; a combination of demand and supply
scarcity: when human wants for goods and services exceed the available supply
command economy: an economy where economic decisions are passed down from government authority and where the government owns the resources

Chapter 2

Choice in a World of Scarcity

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Summary

The budget constraint, which is the frontier of the opportunity set, illustrates the range of available choices. The relative price of the choices determines the slope of the budget constraint. Choices beyond the budget constraint are not affordable Opportunity cost measures cost by what we forgo in exchange.

Key terms

budget constraint: all possible consumption combinations of goods that someone can afford, given the prices of goods, when all income is spent; the boundary of the opportunity set
opportunity set: all possible combinations of consumption that someone can afford given the prices of goods and the individual’s income
opportunity cost: measures cost by what we give up/forfeit in exchange; opportunity cost measures the value of the forgone alternative
productive efficiency: when it is impossible to produce more of one good (or service) without decreasing the quantity produced of another good (or service)
positive statement: statement which describes the world as it is
comparative advantage: when a country can produce a good at a lower cost in terms of other goods; or, when a country has a lower opportunity cost of production
law of diminishing marginal utility: as we consume more of a good or service, the utility we get from additional units of the good or service tends to become smaller than what we received from earlier units
law of diminishing returns: as we add additional increments of resources to producing a good or service, the marginal benefit from those additional increments will decline

Chapter 3

Demand and Supply

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Summary

The equilibrium price and equilibrium quantity occur where the supply and demand curves cross. The equilibrium occurs where the quantity demanded is equal to the quantity supplied. The law of demand states that a higher price typically leads to a lower quantity demanded The law of supply says that a higher price typically leads to a higher quantity supplied

Key terms

demand: the relationship between price and the quantity demanded of a certain good or service
supply: the relationship between price and the quantity supplied of a certain good or service
equilibrium: the situation where quantity demanded is equal to the quantity supplied; the combination of price and quantity where there is no economic pressure from surpluses or shortages…
law of demand: the common relationship that a higher price leads to a lower quantity demanded of a certain good or service and a lower price leads to a higher quantity demanded, while all other…
law of supply: the common relationship that a higher price leads to a greater quantity supplied and a lower price leads to a lower quantity supplied, while all other variables are held constant
equilibrium quantity: the quantity at which quantity demanded and quantity supplied are equal for a certain price level
quantity demanded: the total number of units of a good or service consumers are willing to purchase at a given price
quantity supplied: the total number of units of a good or service producers are willing to sell at a given price

Chapter 4

Labor and Financial Markets

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Summary

In the demand and supply analysis of financial markets, the “price” is the rate of return or the interest rate received. In the labor market, households are on the supply side of the market and firms are on the demand side. In the market for financial capital, households and firms can be on either side of the market: they are suppliers of financial capital when they save or make financial investments, and demanders of financial capital… In the demand and supply analysis of labor markets, we can measure the price by the annual salary or hourly wage received.

Key terms

interest rate: the “price” of borrowing in the financial market; a rate of return on an investment
minimum wage: a price floor that makes it illegal for an employer to pay employees less than a certain hourly rate
usury laws: laws that impose an upper limit on the interest rate that lenders can charge

Chapter 5

Elasticity

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Summary

An inelastic demand or supply curve is one where a given percentage change in price will cause a smaller percentage change in quantity demanded or supplied. Price elasticity measures the responsiveness of the quantity demanded or supplied of a good to a change in its price. A unitary elasticity means that a given percentage change in price leads to an equal percentage change in quantity demanded or supplied Infinite or perfect elasticity refers to the extreme case where either the quantity demanded or supplied changes by an infinite amount in response to any change in price at all.

Key terms

elasticity: an economics concept that measures responsiveness of one variable to changes in another variable
elastic demand: when the elasticity of demand is greater than one, indicating a high responsiveness of quantity demanded or supplied to changes in price
inelastic demand: when the elasticity of demand is less than one, indicating that a 1 percent increase in price paid by the consumer leads to less than a 1 percent change in purchases (and vice…
unitary elasticity: when the calculated elasticity is equal to one indicating that a change in the price of the good or service results in a proportional change in the quantity demanded or supplied
price elasticity: the relationship between the percent change in price resulting in a corresponding percentage change in the quantity demanded or supplied
inelastic demand or supply curve: one where a given percentage change in price will cause a smaller percentage change in quantity demanded or supplied
cross-price elasticity of demand: the percentage change in the quantity of good A that is demanded as a result of a percentage change in the price of good B

Chapter 6

The Macroeconomic Perspective

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Summary

To avoid double counting, GDP counts only final output of goods and services, not the production of intermediate goods or the value of labor in the chain of production Economists generally express the size of a nation’s economy as its gross domestic product (GDP), which measures the value of the output of all final goods and services produced within the country in a year. We can divide what is produced in the economy into durable goods, nondurable goods, services, structures, and inventories. Economists measure GDP by taking the quantities of all goods and services produced, multiplying them by their prices, and summing the total.

Key terms

double counting: a potential mistake to avoid in measuring GDP, in which output is counted more than once as it travels through the stages of production
service: product which is intangible (in contrast to goods) such as entertainment, healthcare, or education
sum of what: purchased in the economy or what is produced
intermediate good: output provided to other businesses at an intermediate stage of production, not for final users; contrast with “final good and service”
nominal value: the economic statistic actually announced at that time, not adjusted for inflation; contrast with real value
gross domestic product (GDP): the value of the output of all final goods and services produced within a country in a year
real value: an economic statistic after it has been adjusted for inflation; contrast with nominal value
structure: building used as residence, factory, office building, retail store, or for other purposes

Chapter 7

Economic Growth

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Summary

The Industrial Revolution facilitated the extensive process of economic growth, that economists often refer to as modern economic growth. We can measure productivity, the value of what is produced per worker, or per hour worked, as the level of GDP per worker or GDP per hour. Since the early nineteenth century, there has been a spectacular process of long-run economic growth during which the world’s leading economies—mostly those in Western Europe and North America—expanded GDP per capita… In the last half-century, countries like Japan, South Korea, and China have shown the potential to catch up.

Key terms

Industrial Revolution: the widespread use of power-driven machinery and the economic and social changes that occurred in the first half of the 1800s
value of what: produced per worker, or per hour worked, as the level of GDP per worker or GDP per hour
modern economic growth: the period of rapid economic growth from 1870 onward
labor productivity: the value of what is produced per worker, or per hour worked (sometimes called worker productivity)
aggregate production function: the process whereby an economy as a whole turns economic inputs such as human capital, physical capital, and technology into output measured as GDP per capita
contractual rights: the rights of individuals to enter into agreements with others regarding the use of their property providing recourse through the legal system in the event of noncompliance
production function: the process whereby a firm turns economic inputs like labor, machinery, and raw materials into outputs like goods and services that consumers use
rule of law: the process of enacting laws that protect individual and entity rights to use their property as they see fit. Laws must be clear, public, fair, and enforced, and applicable to…

Chapter 8

Unemployment

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Summary

A person without a job must be willing and able to work and actively looking for work to be counted as unemployed; otherwise, a person without a job is counted as out of the labor force. We can divide the adult population into those in the labor force and those out of the labor force. Economists define the unemployment rate as the number of unemployed persons divided by the number of persons in the labor force (not the overall adult population). Unemployed individuals experience loss of income and stress.

Key terms

out of the labor force: those who are not working and not looking for work—whether they want employment or not; also termed “not in the labor force”
unemployment rate: the percentage of adults who are in the labor force and thus seeking jobs, but who do not have jobs
person without a job: counted as out of the labor force
implicit contract: an unwritten agreement in the labor market that the employer will try to keep wages from falling when the economy is weak or the business is having trouble, and the employee will…
insider-outsider model: those already working for the firm are “insiders” who know the procedures; the other workers are “outsiders” who are recent or prospective hires
labor force participation rate: this is the percentage of adults in an economy who are either employed or who are unemployed and looking for a job
relative wage coordination argument: across-the-board wage cuts are hard for an economy to implement, and workers fight against them
underemployed: individuals who are employed in a job that is below their skills

Chapter 9

Inflation

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Summary

Economists often express the price level in terms of index numbers, which transform the cost of buying the basket of goods and services into a series of numbers in the same proportion to each other, but with an… We measure the inflation rate as the percentage change between price levels or index numbers over time The most commonly cited measure of inflation is the Consumer Price Index (CPI), which is based on a basket of goods representing what the typical consumer buys. The Core Inflation Index further breaks down the CPI by excluding volatile economic commodities.

Key terms

inflation: a general and ongoing rise in price levels in an economy
basket of goods and services: a hypothetical group of different items, with specified quantities of each one meant to represent a “typical” set of consumer purchases, used as a basis for calculating how the…
Consumer Price Index (CPI): a measure of inflation that U.S. government statisticians calculate based on the price level from a fixed basket of goods and services that represents the average consumer's…
core inflation index: a measure of inflation typically calculated by taking the CPI and excluding volatile economic variables such as food and energy prices to better measure the underlying and…
index number: a unit-free number derived from the price level over a number of years, which makes computing inflation rates easier, since the index number has values around 100
substitution bias: an inflation rate calculated using a fixed basket of goods over time tends to overstate the true rise in the cost of living, because it does not take into account that the person…
base year: arbitrary year whose value as an index number economists define as 100; inflation from the base year to other years can easily be seen by comparing the index number in the other…
International Price Index: a measure of inflation based on the prices of merchandise that is exported or imported

Chapter 10

The International Trade and Capital Flows

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Summary

The current account balance includes the trade in goods, services, and money flowing into and out of a country from investments and unilateral transfers The trade balance measures the gap between a country’s exports and its imports. In most high-income economies, goods comprise less than half of a country’s total production, while services comprise more than half. As we will see below, a trade deficit necessarily means a net inflow of financial capital from abroad, while a trade surplus necessarily means a net outflow of financial capital from an economy to other countries

Key terms

current account balance: a broad measure of the balance of trade that includes trade in goods and services, as well as international flows of income and foreign aid
unilateral transfers: “one-way payments” that governments, private entities, or individuals make that they sent abroad with nothing received in return
financial capital: the international flows of money that facilitates trade and investment
country: a net borrower from the rest of the world
national savings and investment identity: the total of private savings and public savings (a government budget surplus)
balance of trade (trade balance): the gap, if any, between a nation’s exports and imports
merchandise trade balance: the balance of trade looking only at goods

Chapter 11

The Aggregate Demand/Aggregate Supply Model

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Summary

Neoclassical economists emphasize Say’s law, which holds that supply creates its own demand. The downward-sloping aggregate demand (AD) curve shows the relationship between the price level for outputs and the quantity of total spending in the economy. Keynesian economists emphasize Keynes’ law, which holds that demand creates its own supply. The upward-sloping short run aggregate supply (SRAS) curve shows the positive relationship between the price level and the level of real GDP in the short run.

Key terms

aggregate demand/aggregate supply model: a model that shows what determines total supply or total demand for the economy, and how total demand and total supply interact at the macroeconomic level
neoclassical economists: economists who generally emphasize the importance of aggregate supply in determining the size of the macroeconomy over the long run
aggregate demand (AD): the amount of total spending on domestic goods and services in an economy
aggregate demand (AD) curve: the total spending on domestic goods and services at each price level
aggregate supply curve: near-horizontal on the left and near-vertical on the right
Keynes’ law: “demand creates its own supply”
Say’s law: “supply creates its own demand”

Chapter 12

The Keynesian Perspective

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Summary

The latter is an example of a macroeconomic externality. Aggregate demand is the sum of four components: consumption, investment, government spending, and net exports. Consumption will change for a number of reasons, including movements in income, taxes, expectations about future income, and changes in wealth levels. Investment will change in response to its expected profitability, which in turn is shaped by expectations about future economic growth, the creation of new technologies, the price of key inputs, and tax incentives for…

Key terms

macroeconomic externality: occurs when what happens at the macro level is different from what happens at the micro level; an example would be where, because of the coordination argument, upward sloping…
latter: an example of a macroeconomic externality
coordination argument: downward wage and price flexibility requires perfect information about the level of lower compensation acceptable to other laborers and market participants
expansionary fiscal policy: tax cuts or increases in government spending designed to stimulate aggregate demand and move the economy out of recession
sticky wages and prices: a situation where wages and prices do not fall in response to a decrease in demand, or do not rise in response to an increase in demand
expenditure multiplier: Keynesian concept that asserts that a change in autonomous spending causes a more than proportionate change in real GDP
contractionary fiscal policy: tax increases or cuts in government spending designed to decrease aggregate demand and reduce inflationary pressures
real GDP: the amount of goods and services actually sold in a nation

Chapter 13

The Neoclassical Perspective

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Summary

The neoclassical perspective argues that, in the long run, the economy will adjust back to its potential GDP level of output through flexible price levels. A rational expectations perspective argues that people have excellent information about economic events and how the economy works and that, as a result, price and other economic adjustments will happen very quickly. In adaptive expectations theory, people have limited information about economic information and how the economy works, and so price and other economic adjustments can be slow Thus, the neoclassical perspective views the long-run AS curve as vertical.

Key terms

neoclassical perspective: the philosophy that, in the long run, the business cycle will fluctuate around the potential, or full-employment, level of output
rational expectations: the theory that people form the most accurate possible expectations about the future that they can, using all information available to them
adaptive expectations: the theory that people look at past experience and gradually adapt their beliefs and behavior as circumstances change
economy: approaching full employment
physical capital per person: the amount and kind of machinery and equipment available to help a person produce a good or service
expected inflation: a future rate of inflation that consumers and firms build into current decision making

Chapter 14

Money and Banking

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Summary

M2 includes all of M1, plus savings deposits, time deposits like certificates of deposit, and money market funds There are two types of money: commodity money, which is an item used as money, but which also has value from its use as something other than money; and fiat money, which has no intrinsic value, but is declared by a… Money serves several functions: a medium of exchange, a unit of account, a store of value, and a standard of deferred payment. We measure money with several definitions: M1 includes currency and money in checking accounts (demand deposits).

Key terms

money: whatever serves society in four functions: as a medium of exchange, a store of value, a unit of account, and a standard of deferred payment
money market fund: the deposits of many investors are pooled together and invested in a safe way like short-term government bonds
commodity money: an item that is used as money, but which also has value from its use as something other than money
demand deposit: checkable deposit in banks that is available by making a cash withdrawal or writing a check
fiat money: has no intrinsic value, but is declared by a government to be the country's legal tender
medium of exchange: whatever is widely accepted as a method of payment
savings deposit: bank account where you cannot withdraw money by writing a check, but can withdraw the money at a bank—or can transfer it easily to a checking account
time deposit: account that the depositor has committed to leaving in the bank for a certain period of time, in exchange for a higher rate of interest; also called certificate of deposit

Chapter 15

Monetary Policy and Bank Regulation

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Summary

A bank run occurs when there are rumors (possibly true, possibly false) that a bank is at financial risk of having negative net worth. The most prominent task of a central bank is to conduct monetary policy, which involves changes to interest rates and credit conditions, affecting the amount of borrowing and spending in an economy. Some prominent central banks around the world include the U.S. Federal Reserve, the European Central Bank, the Bank of Japan, and the Bank of England

Key terms

bank run occurs when there: rumors (possibly true, possibly false) that a bank is at financial risk of having negative net worth
deposit insurance: an insurance system that makes sure depositors in a bank do not lose their money, even if the bank goes bankrupt
bank run: when depositors race to the bank to withdraw their deposits for fear that otherwise they would be lost
central bank: institution which conducts a nation’s monetary policy and regulates its banking system
reserve requirement: the percentage amount of its total deposits that a bank is legally obligated to either hold as cash in their vault or deposit with the central bank
inflation targeting: a rule that the central bank is required to focus only on keeping inflation low
quantitative easing (QE): the purchase of long term government and private mortgage-backed securities by central banks to make credit available in hopes of stimulating aggregate demand
open market operations: the central bank selling or buying Treasury bonds to influence the quantity of money and the level of interest rates

Chapter 16

Exchange Rates and International Capital Flows

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Summary

In the foreign exchange market, people and firms exchange one currency to purchase another currency. On the supply side of the foreign exchange market for the trading of U.S. The demand for dollars comes from those U.S. Export firms seeking to convert their earnings in foreign currency back into U.S.

Key terms

international capital flows: flow of financial capital across national boundaries either as portfolio investment or direct investment
foreign exchange market: the market in which people use one currency to buy another currency
portfolio investment: an investment in another country that is purely financial and does not involve any management responsibility
appreciating: when a currency is worth more in terms of other currencies; also called “strengthening”
depreciating: when a currency is worth less in terms of other currencies; also called “weakening”
dollarize: a country that is not the United States uses the U.S. dollar as its currency
soft peg: an exchange rate policy in which the government usually allows the market to set the exchange rate, but in some cases, especially if the exchange rate seems to be moving rapidly…
arbitrage: the process of buying a good and selling goods across borders to take advantage of international price differences

Chapter 17

Government Budgets and Fiscal Policy

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Summary

When a government spends more than it collects in taxes, it is said to have a budget deficit. When a government collects more in taxes than it spends, it is said to have a budget surplus. If government spending and taxes are equal, it is said to have a balanced budget. Fiscal policy is the set of policies that relate to federal government spending, taxation, and borrowing.

Key terms

balanced budget: when government spending and taxes are equal
budget deficit: when the federal government spends more money than it receives in taxes in a given year
budget surplus: when the government receives more money in taxes than it spends in a year
proportional tax: a tax that is a flat percentage of income earned, regardless of level of income
automatic stabilizers: tax and spending rules that have the effect of slowing down the rate of decrease in aggregate demand when the economy slows down and restraining aggregate demand when the economy…
contractionary fiscal policy: fiscal policy that decreases the level of aggregate demand, either through cuts in government spending or increases in taxes
discretionary fiscal policy: the government passes a new law that explicitly changes overall tax or spending levels with the intent of influencing the level of overall economic activity
expansionary fiscal policy: fiscal policy that increases the level of aggregate demand, either through increases in government spending or cuts in taxes

Chapter 18

The Impacts of Government Borrowing

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Summary

The theory of Ricardian equivalence holds that changes in private saving will offset changes in government borrowing or saving. A change in any part of the national saving and investment identity suggests that if the government budget deficit changes, then either private savings, private investment in physical capital, or the trade balance—or… The government need not balance its budget every year. However, a sustained pattern of large budget deficits over time risks causing several negative macroeconomic outcomes: a shift to the right in aggregate demand that causes an inflationary increase in the price level…

Key terms

Ricardian equivalence: the theory that rational private households might shift their saving to offset government saving or borrowing
twin deficits: deficits that occur when a country is running both a trade and a budget deficit
Head Start program: a program for early childhood education directed at families with limited educational and financial resources

Chapter 19

Macroeconomic Policy Around the World

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Summary

Macroeconomic policy goals for most countries strive toward low levels of unemployment and inflation, as well as stable trade balances. Economists analyze countries based on their GDP per person and ranked as low-, middle-, and high-income countries. Low-income are those earning less than $1,025 (less than 1%) of global income. They currently have 18.5% of the world population.

Key terms

growth consensus: a series of studies that show, statistically, that 70% of the differences in income per person across the world is explained by differences in physical capital (savings/investment)
converging economy: economy of a country that has demonstrated the ability to catch up to the technology leaders by investing in both physical and human capital
East Asian Tigers: the economies of Taiwan, Singapore, Hong Kong, and South Korea, which maintained high growth rates and rapid export-led industrialization between the early 1960s and 1990…
middle-income country: a nation with per capita income between $1,025 and $12, 475 and that has shown some ability, even if not always sustained, to catch up to the technology leaders in high-income…
high-income country: nation with a per capita income of $12,475 or more; typically has high levels of human and physical capital
low-income country: a nation that has a per capita income of less than $1,025; a third of the world’s population

Chapter 20

International Trade

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Summary

A country has an absolute advantage in those products in which it has a productivity edge over other countries; it can produce more of a product. Countries that specialize based on comparative advantage gain from trade If other countries specialize in the area of their comparative advantage as well and trade, the highly productive country is able to benefit from a lower opportunity cost of production in other countries A country has a comparative advantage when it can produce a good at a lower cost in terms of other goods.

Key terms

absolute advantage: when one country has more resources, more productive resources, or a natural endowment to produce a good compared to another country; when a country can produce more of a good…
gain from trade: a country that can consume more than it can produce as a result of specialization and trade
highly productive country: able to benefit from a lower opportunity cost of production in other countries
value chain: how a good is produced in stages
splitting up the value chain: many of the different stages of producing a good happen in different geographic locations
intra-industry trade: international trade of goods within the same industry
tariffs: taxes that governments place on imported goods

Chapter 21

Globalization and Protectionism

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Summary

There are three tools for restricting the flow of trade: tariffs, import quotas, and nontariff barriers. When a country places limitations on imports from abroad, regardless of whether it uses tariffs, quotas, or nontariff barriers, it is said to be practicing protectionism. Protectionism will raise the price of the protected good in the domestic market, which causes domestic consumers to pay more, but domestic producers to earn more In thinking about labor practices in low-income countries, it is useful to draw a line between what is unpleasant to think about and what is morally objectionable.

Key terms

protectionism: government policies to reduce or block imports
line between what: unpleasant to think about and what is morally objectionable
nontariff barriers: ways a nation can draw up rules, regulations, inspections, and paperwork to make it more costly or difficult to import products
import quotas: numerical limits on the quantity of products that a country can import
national interest argument: the argument that there are compelling national interests against depending on key imports from other nations
anti-dumping laws: laws that block imports sold below the cost of production and impose tariffs that would increase the price of these imports to reflect their cost of production
common market: economic agreement between countries to allow free trade in goods, services, labor, and financial capital between members while having a common external trade policy
disruptive market change: innovative new product or production technology which disrupts the status quo in a market, leading the innovators to earn more income and profits and the other firms to lose…