SSRIC Teaching Resources Depository
James Gerber, San Diego State University

Macroeconomic Glossary

© The Author, 1998; Last Modified 14 August 1998
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 variableís 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 periodís output in order to expand the economyís 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, travelerís 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 nationís 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.

Okunís 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 studentís 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.

Module Table of Contents