CHAPTER 6- GOVERNMENT SPENDING

Nationalization The taking of private property by the government.

Budget Surplus The amount by which a governments revenue exceeds its expenditures.

Budget deficit The amount by which a governments expenditures exceed its revenue.

Balanced budget the condition that results when a governments revenue exactly equals its
expenditures.

Private good A good that can be supplied efficiently by private competitive markets.

Public good - a good that tends to be undersupplied in private competitive markets.

Nonexcludable good a good that people cannot be excluded from using.

Nonrivalrous good a good that unlimited numbers of people can use without interfering with each
others enjoyment.

Excludable good a good that is not nonexcludable.

Rivalrous good a good that is not nonrivalrous.

Equity Justice or fairness in the distribution of resources.

Productive government spending government spending with benefits that exceed its cost.

Wasteful government spending government spending with benefits that are less than its cost.

Pure transfers ( transfer payments) government spending with benefits that are exactly equal to its
cost; usually in the form of cash payments from one person to another.

Temporary government spending government spending that lasts only a single period of time.

Permanent government spending government spending that is repeated in each period of time.

Variable tax a tax in which the amount paid is dependent on the value of some quantity that is within
an individuals control.

Lump-sum tax a tax in which the amount paid is not dependent on any variables that are within an
individuals control.

Head tax (poll tax) a type of lumpsum tax in which each person pays the same amount.

Disincentive effect the substitution effect that results from taxing consumption or production of a
specific good, thereby discouraging the activity by raising the price of doing it.

Deficit the amount that a government borrows in a given period of time.

Government debt the cumulative amount that a government owes as a result of all past borrowing.

Ricardian equivalence the proposition that taxation and government borrowing have identical effects
on an economy.
Bequest motive the desire to leave an inheritance.

CHAPTER 7 INVESTMENT

Capital goods that are used to produce consumption goods.

Investment an addition to capital.

Physical capital physical goods that are used to produce consumption goods.

Human capital Individual skills or knowledge that is used to produce consumption goods.

Marginal product of capital (MPK) the additional output that results when capital is increased by 1
unit and all other productive factors are held constant.

Diminishing marginal product of capital the concept that each additional unit of capital adds less to
output than the previous unit added.

Demand for capital the quantity of capital firms wish to hold, expressed as a function of the interest
rate.

Demand for investment the quantity of investment (per period) firms wish to undertake, expressed as
a function of the interest rate.

MPK curve a curve expressing the marginal product of capital as a function of the quantity of capital
held.

Demand curve for capital a curve illustrating the demand for capital.

Aggregate investment demand curve a curve illustrating the total demand for investment by all firms
as a function of the interest rate.

Productivity a quantity of output per worker, aggregate output by the number of workers.

Real net investment investment consisting of additions to capital minus depreciation; expressed in
constant dollars.

Net international investment the difference between U.S. investment abroad and foreign investment
in the United States.

U.S. direct investment position abroad (U.S. DIPA) A measure of the capital owned by U.S. citizens but
located abroad.

Foreign direct investment position in the U.S. (foreign DIPU) a measure of the capital owned by
foreign citizens but located in the United States.

Net U.S. direct investment position abroad (net U.S. DIPA) U.S. DIPA minus foreign DIPU.

Exchange rate the price of one nations currency in terms of anothers.