Gross domestic product (GDP)¶
The market value of all final goods and services produced inside a country in a period. By expenditure, .
Key terms from the scenes, grouped by chapter. Each term links to the scene where it is introduced.
The market value of all final goods and services produced inside a country in a period. By expenditure, .
How far actual output sits from potential output. A negative gap is a slump; a positive gap is overheating.
Total spending demanded at each price level. Unlike a micro demand curve, it slopes down because a lower price level raises real money balances, lowers interest rates, and depreciates the currency.
Total output supplied at each price level. Upward-sloping in the short run because some prices are sticky; vertical at potential output in the long run.
How many units of income one unit of spending creates. With marginal propensity to consume , the government-spending multiplier is .
When everyone tries to save more, incomes fall and actual saving does not rise — it can even fall. The classic fallacy of composition: a virtue for one household, a trap for all.
The average level of prices overall. A micro price is an exchange ratio between two goods (a relative price); the price level is the ruler for nominal values themselves.
In the long run, the money supply changes only prices, not real output or employment. It follows from the quantity theory and pairs with short-run non-neutrality.
Starting from the identity (money × velocity = price level × real output), the theory that long-run inflation comes from money growth.
The classical market that sets the interest rate: saving supplies funds, investment demands them, and the interest rate is the price of saved funds.
Government borrowing pushes the interest rate up and displaces private investment, as the deficit absorbs saving in the loanable funds market.
Keynes's theory of the interest rate: people hold money for transactions, precaution, and speculation, and the rate is set where money demand meets money supply.
The fixed cost of changing a price, named after reprinting restaurant menus. Small — but near the optimal price the loss from not adjusting is also small, so prices stick.
Net exports always equal saving minus investment (). A trade deficit is therefore a saving-investment fact, not something a tariff can fix.
The exchange ratio between two countries' goods. It is the price that moves to keep the trade balance identity true — doing the adjusting that tariffs cannot.
In the Solow model, the capital stock where saving exactly offsets depreciation. Growth returns to zero there; only the level remains.
The core of dynamic programming: today's value splits into the payoff of today's choice plus the value of tomorrow, .
How a person evaluates a risky choice: by expected utility , not expected money. A curved utility function is what creates risk aversion and the demand for insurance.
Extra saving held against an uncertain future income. It grows with uncertainty — and when everyone does it at once, aggregate demand falls and a slump can follow.