KEY CONCEPTS AND THINKERS
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Gross Domestic Product (GDP) The total market value in a country
of all final goods and services produced by units located there.
Nominal GDP is the figure in today's money, while real GDP is the
inflation-adjusted figure.
Gross National Product (GNP) The total market value in a country
of all final goods and services produced anywhere by units owned
by that county's nationals.
Inflation A general increase in prices.
International Monetary Fund (IMF) An agency that tries to stabi-
lize international currency exchange rates and lend to countries
having difficulty in financing their international transactions.
M1, M2 Measures of the money supply. M1 is the money that can be
used directly for transactions money, while M2 (also called ``broad
money'') is M1 plus savings accounts and other ``near monies.''
Real business cycle The idea that business cycles fluctuate according
to rational expectations and enjoy complete price and wage flexi-
bility.
Recession The conventional definition is a drop in aggregate output
for two successive quarters or more.
Stagflation When inflation and high unemployment occur together
during a recession.
Tragedy of commons The idea that things that are owned collec-
tively by a group are not efficiently used or maintained because
individuals do not bear the full cost of their actions. The name
comes from a problem in England in the 1700s, when some land
was held in common for the community. Individual farmers had an
incentive to overgraze common land to benefit their own animals,
but overall the community suffered because of the damage to the
land; no one had an incentive to care for the land.
PROTECTIONISM VERSUS FREE TRADE
The argument for free trade is essentially that each country should
specialize in producing the goods and service in which it has a compar-
ative advantage. If a trade barrier is imposed on imports, demand
may drop as consumers have to pay a higher price, and the country's
production is less efficient. Trade has potential benefits for all nations.
Goods are not usually imported unless their net price is below that of
