Section 3 Vocabulary

Blanc. 24-25.

Gross National Product

Total market value of all final and legal goods and services produced by all citizens no matter where the production occurs in one year.

Net National Product

GNP minus Depreciation.

Gross Domestic Product

Nominal GDP is the total market value of all final and legal goods and services produced within the country in one year.

Nominal GDP

Based on the current price of all products and services; grows with inflation, even if there is no growth in production.

Real GDP

Based on an agreed upon year’s constant dollars; adjusted for inflation.

Formula: (nominal GDP)/(price index)

Per Capita GDP

Real GDP per person.

Formula: (real GDP)/(population)

Limitations of and exclusions from GDP analysis

• Doesn’t measure a nation’s “happiness”

• Doesn’t count unpaid work or goods (e.g. housework, volunteer work, etc.)

• Doesn’t count leisure time or psychic income

• Doesn’t count social or environmental costs

• Underground economy doesn’t count (e.g. black market, any other legal activities)

Unemployment rate formula

((number of people unemployed)/(total labor force))(100)

Employed

People who have a job, either full or part time.

Unemployed

Actively looking for work in the past 30 days, eligible to work, but haven’t found a job.

Labor force

Total of employed and unemployed people aged 16 and up; does not count full time students, retired workers, discouraged workers, etc.

Formula: ((total labor force)/(total population age 16 or older))(100)

Discouraged

People capable of working, but have given up looking for a job.

Unemployment rate goal

5% or less.

Causes of unemployment - frictional

Unemployed due to the time it takes to find a job or one who makes a choice to leave a job.

Causes of unemployment - structural

Unemployed do to a worker lacking the skills required for a job; someone or something replaces the worker.

Causes of unemployment - cyclical

Unemployed due to a recession (all the unemployment above 5%).

Costs of unemployment

• Less gods and services sold

• Government earns less income tax revenue

• Unemployment tends to impact younger, unskilled, uneducated and minorities more

• Costs of unemployment benefits

• Increase in poverty (which could lead to potentially higher incidences of crime)

• Loss of morale

Inflation

A general increase in price levels.
Goal is to have the inflation rate be 4% or less.

Those hurt by inflation

• Those whose wages increase by less than the inflation rate

• Those on fixed incomes

• Savers

• Money Lenders (that’s why banks charge interest!)

Those helped by inflation

• Borrowers

• Those with flexible incomes

Real rate of interest

The rate of profit that the financial institutions want to make when a borrower borrows money.

Nominal rate of interest

The rate at which financial institutions actually charge borrowers to borrow money.
Formula: nominal rate = real rate + inflation rate

Inflation rate formula based on the consumer price index

((price of selected items in the current year)/(price of selected items in the base year))(100)

(specifically) inflation rate formula

((CPI (current year) - CPI (last year))/CPI (last year))(100)