APMacro Unit 2

Gross Domestic Product

The dollar value of all final goods and services produced within a country's borders in one year.

GDP per capita

GDP divided by the population. Used to measure if standard of living is improving.

GDP expenditures approach

Adds up all the spending (C + I + G + Xn) on final goods and services that were produced in a given year

GDP income approach

Alternative method of calculating GDP that adds up all the income that resulted from selling all final goods and services produced in a given year

Value added approach

An alternative method of calculating GDP by adding up the increases in product value as it makes its way through the production process. This approach would look at the increase in value of intermediate goods throughout the production process.

Nominal GDP

GDP measured in current prices.

Real GDP

GDP adjusted for inflation, necessary to understand whether a change in GDP is due to a change in productivity or simply a change in price level.

Business Cycle

The natural rise and fall of economic growth that occurs over time.

C + I + G + Xn

The formula for calculating GDP using the expenditure approach.

Unemployed

Workers that are out of work, actively looking for a job, but unable to find a job.

Frictional Unemployment

When a worker is between jobs, or a student has graduated and is looking for her/his first job. Individuals are qualified workers with transferable skills

Seasonal Unemployment

A type of frictional unemployment which is due to time of year and the nature of the job

Structural Unemployment

Workers do not have transferable skills and these jobs won't come back. This category includes technological unemployment.

Technological Unemployment

A type of structural unemployment where automation and machinery replace workers

Cyclical Unemployment

Unemployment caused by a reduction in the output of a country, when a country is operating inside it's PPC.

Natural Rate of Unemployment (NRU)

Estimated in the US at 4-6%, it is determined by adding frictional + structural unemployment which are expected (while excluding cyclical unemployment which is undesirable). An economy at this level would be on the PPC and be considered healthy. Also known as full employment.

Labor Force Participation Rate

A measure of the percentage of the population, age 16+, that is able and willing to work. Includes both employed and unemployed workers.
Excludes anyone who is under 16 or is not wanting to work or is incapable of working due to hospitalization / incarceration.

(labor force/total population) x 100

The formula for calculating the labor force participation rate of a country.

Inflation

The rising in the general level of prices which reduces the purchasing power of money

Deflation

A decrease in the general level of prices.

Disinflation

Prices are increasing at a slower rate (a reduction in the rate of inflation but NOT a reduction in the general level of prices)

Nominal Wage

The wage an employee is paid

Real Wage

The wage an employee is paid, adjusted for inflation, in order to determine the purchasing power of those wages.

Inflation Rate

The percent change in prices from year to year

(change/old) x 100

Formula for inflation rate

Price Indices

Index numbers assigned to each year that show how prices have changed relative to a specific base year (base year is given an index number of 100)

Substitution Bias

A criticism of price indices caused by consumers buying less of a product in a price index and instead shifting demand to a competitive good which is not in the market basket used to calculate the price index.

Real Interest Rate

The portion of the nominal interest rate after the inflation rate is removed. It is calculated as follows: Nominal interest - Inflation

Nominal Interest Rate

The advertised rate of interest

Hidden unemployment

The unemployment of potential workers that is not taken into account in official unemployment statistics because of how the data is collected. For example, workers are only considered unemployed if they are looking for work so those without jobs who have stopped looking are no longer considered "unemployed" but in all reality may truly be.

Discouraged worker

A person of legal employment age who desires to be employed but is not actively seeking employment, often because they couldn't find a job and thus gave up.

Underemployed workers

Workers who are highly skilled but working in low skill jobs OR part-time workers who would prefer to be full time but are unable to locate full-time work. These workers are not counted in the unemployment rate.

Economic growth

An increase in real GDP, often measured on a per capita basis.

Intermediate goods

Goods used in the production of other goods, including final goods. Not counted in GDP.

Non-production transactions

Financial transactions and re-sale (second-hand) transactions. Not counted in GDP.

Non-market transactions

This category includes goods or services supplied to others for free (household production) as well as illegal transactions. Not counted in GDP.

Household production

Goods and services produced by households for their own use/consumption. It is a non-market transaction and thus not counted in GDP.

Peak

The highest point between the end of an economic expansion and the start of a contraction in a business cycle

Trough

The lowest point between the end of a contraction and the start of an economic expansion in the business cycle.

Expansion

Phase of the business cycle in which the economy as a whole is growing. Also known as a recovery.

Contraction

Phase of the business cycle in which the economy as a whole is in decline. Multiple periods of this lead to a recession.

Full Employment

Typically around 4-6% unemployed, at this level there is no cyclical unemployment but rather just structural and frictional unemployment.. Also known as NRU.

Inflationary gap

A situation where actual GDP exceeds full-employment/NRU GDP. At this level even some structural/frictional workers are finding jobs, and businesses face severe competition for workers compete by offering higher wages. This drives up the price level.

Hyperinflation

A situation where prices rise more than 50% in a period of a month.

Stagflation

A situation where there is high inflation with high unemployment along with limited economic growth.

Consumer Price Index

A measure calculated by the Bureau of Labor Statistics (BLS) that examines the weighted average of prices of a basket of consumer goods and services. May include domestic and international consumer goods.

(Price of Basket / Price of Basket in Base Year) x 100

Formula for CPI

GDP Deflator

Calculated by the Bureau of Economic Analysis (BEA) in the US, it is an index value that allows for the removal of inflation from a nominal GDP value in order to calculate the real GDP.

(Nominal GDP/Real GDP) x 100

Formula for the GDP deflator

Cost of Living Adjustments (COLA)

An adjustment made to Social Security and Supplemental Security Income to counteract the effects of inflation.

Trend line

Indicates the general pattern or direction of the economy in the business cycle. In the US, this is upward sloping indicating growth in real GDP over time.

Fluctuation

A change (rising or falling)

Boom

An economic expansion period when GDP is above the long-run trend.

Bust

An economic contraction period when GDP is below the long-run trend.

Recessionary Gap

The amount by which actual GDP is less than full-employment GDP.

Recession

Two quarters of consecutive negative GDP growth.

(# of unemployed / # in labor force) x 100

Formula for unemployment rate

Unemployment rate

The percent of people in the labor force who want a job but are not working

Labor force

The sum of employed + unemployed people (unemployed = actively searching, able to work, 16+, not retired or underemployed, not in jail or hospital or military or school full time).

Standard of Living

The degree of wealth and material comfort available to a person or community.

Output growth

Also known as GDP growth, this measures the change in real GDP from one year to the next.

((Year 2 real GDP - Year 1 real GDP)/Year 1 real GDP) x 100

Formula for calculating percent change in GDP (output growth)