Glossary
AD Curve
A graphical representation showing the inverse relationship between the overall price level and the quantity of Real GDP demanded in an economy.
Example:
If the overall price level in an economy falls, we would see a movement down along the AD Curve, indicating an increase in the quantity of real GDP demanded.
Aggregate Demand (AD)
The total demand for all goods and services in an economy at various price levels, representing the entire economy's shopping list.
Example:
When economists discuss the overall health of the U.S. economy, they often analyze changes in Aggregate Demand to understand total spending.
Consumer Spending (C)
Expenditures by households on goods and services, excluding new housing.
Example:
A surge in holiday shopping, where families buy gifts and decorations, directly contributes to an increase in Consumer Spending.
Foreign Trade Effect
The change in net exports caused by changes in the domestic price level relative to foreign price levels.
Example:
If prices in the U.S. rise significantly while prices in Europe remain stable, American goods become more expensive for Europeans, leading to fewer U.S. exports due to the Foreign Trade Effect.
Government Spending (G)
Expenditures by local, state, and federal governments on goods and services, such as infrastructure projects or military equipment.
Example:
A government decision to build a new high-speed rail network across the country represents a significant increase in Government Spending.
Interest Rate Effect
The change in investment and consumption spending caused by changes in interest rates, which are influenced by changes in the price level.
Example:
When the price level rises, people need more money for transactions, increasing the demand for money and pushing up interest rates, which then reduces investment due to the Interest Rate Effect.
Investment Spending (I)
Spending by businesses on capital goods (like machinery and factories) and by households on new residential construction.
Example:
When a tech company builds a new data center or a family buys a newly constructed home, these actions fall under Investment Spending.
Market Demand
The demand for a single, specific good or service within a particular market.
Example:
The demand for a new smartphone model in the technology sector is an example of Market Demand, not the entire economy's demand.
Net Exports (NX)
The value of a country's total exports minus the value of its total imports.
Example:
If a country sells more goods to other nations than it buys from them, it has positive Net Exports, contributing positively to its aggregate demand.
Price Level
A measure of the average prices of goods and services in an economy at a given point in time.
Example:
Economists track the Consumer Price Index (CPI) to understand changes in the overall Price Level and inflation.
Real GDP
The total value of all final goods and services produced in an economy within a given period, adjusted for inflation.
Example:
If an economy's output of goods and services increases from one year to the next, even after accounting for price changes, its Real GDP has grown.
Real Wealth Effect
The change in consumer spending due to changes in the purchasing power of consumers' assets when the price level changes.
Example:
If inflation causes prices to rise significantly, your savings account balance can buy less, illustrating the Real Wealth Effect as your purchasing power decreases.