Ch2 - Chapter 2: Thinking Like an Economist Some vocabulary...

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Chapter 2: Thinking Like an Economist Some vocabulary terms in the Workbook Aggregate income and aggregate expenditures Resource owners supply land, labor, capital and entrepreneurial talent. They earn income for this. The income received by those who supply "land" is called rent; for labor, the income component is "wages and salaries"; for capital, it is "interest on capital" which includes items such as dividends, and for entrepreneurship, the reward is "profit". Collectively, these income components make up " aggregate income ". Aggregate expenditures are expenditures on final goods and services incurred by the 4 sectors; households, firms, government and the foreign sector. The spending component incurred by households is called Consumption (C), by firms: Gross Private Investment (I); by the Government: Government Purchases (G) (not to be confused by “Government Spending” which also includes transfer payments); and by the foreign sector: Net Exports (XM) Net exports = exports(X) - Imports (M). Imports are taken out because they represent expenditures on goods produced in foreign countries, not on domestically produced goods. Factor markets Factor markets is the same thing as "factors of production markets" i.e. the resource market or the input market. In other words, in the market factors of production are traded. Also see text, pg. 24 An important result of circular flow model is that aggregate income (earned by resource owners) must equal aggregate expenditures on final goods and services. Workbook, pg. 7 The Law of Increasing Opportunity Cost (or Law of Increasing Marginal Opportunity Cost) States that the cost of producing additional units of a good or service increases as more of that product is produced. This law holds because resources are relatively specialized. If production obeys the Law of IOC, then the PPF is concave (bowed toward the origin), as opposed to linear. A linea r PPF implies that the opportunity cost remains constant, not increasing. Note that in either situation (concave or linear) there is a tradeoff; the only difference is that in the case of a concave PPF, the tradeoff is increasing, meaning it gets more costly to produce additional units, whereas, in the case of a linear PPF, the tradeoff is constant. Please see solution to Q2 posted on page 3 here. Real flows vs. nominal flows All nominal flows are denoted in current dollar values, that is, in market prices. For example, if you receive $30 an hour this is your nominal wage. Nominal variables are observed. The sticker prices on item, the interest rate on your credit card, the amount in your checking account -- all these are nominal variables. A
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Ch2 - Chapter 2: Thinking Like an Economist Some vocabulary...

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