Macroeconomics: National Income, Unemployment, and Aggregate Models

Comprehensive practice flashcards covering macroeconomics fundamentals, including business cycles, GDP accounting, unemployment metrics, inflation, and the AD/AS models including Classical and Keynesian perspectives.

Business Cycle

The demonstration of GDP over time, characterized by peaks and troughs resembling a wave.

Recession

The movement from peak to trough in the business cycle, representing a significant decline in economic activity including GDP, income, employment, production, and retail sales.

National Income Accounting

The process of developing and analyzing measures of economic output and performance to inform policy changes intended to improve the economy.

Gross Domestic Product (GDP)

The market value of all final goods and services produced within the geographic boundaries of an economy (e.g., the U.S.) during a given time period.

Gross National Product (GNP)

The market value of all final goods and services produced by American companies anywhere in the world, excluding production by foreign companies.

Final Goods and Services

Goods and services purchased by consumers, firms, or government for final use and consumption, excluding raw materials and items intended for resale to avoid double counting.

Secondhand Sales

The reselling of items like houses or cars, which are specifically excluded from GDP calculations because they were not produced in the current period.

Net Domestic Product (NDP)

A measure of nation's output available for consumption or adding to net wealth, calculated as $NDP = GDP - \text{depreciation}$.

Depreciation

The measure of a nation’s capital stock that has worn out, including physical wear of machinery, buildings, and vehicles.

Expenditures Approach

A method of calculating GDP by summing all spending on final goods and services, expressed as $GDP = C + I + G + (X-M)$, where C is consumption, I is investment, G is government spending, and (X-M) is net exports.

Income Approach

A method of measuring GDP by summing all incomes earned by domestic resource owners, expressed as $GDP = w + i + r + \pi$, representing wages, interest, rent, and profit.

Personal Income

The total gross income actually received by people from all sources, calculated by adjusting national income for taxes, retained earnings, and transfer payments.

Disposable Income

The after-tax income available to people for spending or saving, calculated as $DI = PI - T$ or $DI = C + S$.

NICAP

Non Institutionalized Civilian Adult Population; the group of individuals eligible to have a job, excluding the institutionalized, those under 16, and members of the armed forces.

Labor Force

The group of individuals within the NICAP who are either employed (have a job) or unemployed (actively looking for a job).

Unemployment Rate

The percentage of the labor force that wants to work but does not have a job, calculated as \frac{\text{# of unemployed}}{\text{size of labor force}}.

Underemployment

A situation where an individual is employed in a job that does not fully use their skills/education or is working part-time when full-time work is desired.

Discouraged Worker

An individual who was looking for a job but gave up, thus leaving the labor force and causing the unemployment rate to drop.

LFPR (Labor Force Participation Rate)

The percentage of the eligible population interested in working, calculated as $\frac{\text{Labor force}}{\text{NICAP}}$; it determines the location of the PPF.

Frictional Unemployment

Short-term unemployment occurring when individuals are between jobs or switching careers.

Structural Unemployment

Long-term, involuntary unemployment caused by skills no longer being useful due to technological changes or shifts in the labor market structure.

Cyclical Unemployment

Unemployment resulting from economic downturns such as recessions and depressions within business cycles.

Full Employment

A sustainable level of employment where there is a lack of cyclical unemployment, representing the level of output known as potential GDP.

Natural Rate of Unemployment

The combined rate of frictional and structural unemployment for a country; it is never zero.

Okun's Law

An economic rule stating that for every $1\%$ increase in the unemployment rate, there is a $2\%$ loss of Potential GDP.

Unemployment Insurance

A program started in 1935 with the Social Security Act, funded by employer taxes and government revenue to stabilize the economy and aid citizens.

Inflation

A sustained increase in the general or average price level of an economy.

Deflation

A sustained decrease in the general or average price level of an economy.

Disinflation

A decrease in the rate of inflation, where prices are still rising but at a slower pace.

Purchasing Power

The quantity of goods and services that a given amount of money will buy.

COLAs (Cost of Living Adjustment)

Increases in fixed payments designed to match rising inflation and protect the purchasing power of individuals on fixed incomes.

Bracket Creep

When inflation pushes nominal income into higher tax brackets while real income remains the same, leading to a drop in real disposable income.

Real Interest Rate

The interest rate that accounts for inflation, calculated as $\text{Real interest rate} = \text{Nominal interest rate} - \text{rate of inflation}$.

Hyperinflation

An extreme inflation rate (thousands of percent per year) resulting from printing too much money, leading to the collapse of the financial system and bartering.

Dollarization

An occurrence where a country chooses to use the U.S. dollar instead of its own currency, often during hyperinflation.

Consumer Price Index (CPI)

A price index tracking the prices of final goods and services typically consumed by an average urban family of four.

GDP Deflator

The broadest measure of the price level, tracking the prices of all final goods and services produced.

Real GDP (RGDP)

A measure of output that accounts for inflation by using base year prices, calculated as $\text{RGDP} = \frac{\text{NGDP}}{\text{GDP deflator}} \times 100$.

Demand-Pull Inflation

Inflation caused by an increased demand for goods and services from households, government, firms, and foreign entities, shifting the AD curve out.

Cost-Push Inflation (Stagflation)

A supply shock where increased production costs cause the AS curve to shift back, leading to rising prices and falling output/income.

Wealth Effect

When a decrease in the price level increases the purchasing power of assets like stocks and bonds, leading to higher consumption and increased aggregate demand.

Interest Effect

When a lower price level reduces the demand for money, lowering interest rates and increasing investment (I) and aggregate demand (AD).

Short-Run

A period of time where resource prices, such as wage rates and input costs, are fixed by long-term contracts.

Supply-Side Economics

Policies, such as tax cuts and reduced regulations, intended to shift the AS curve out to achieve growth without inflation.

Recessionary Gap

A situation where the current equilibrium output is less than potential GDP ($YE < YP$), characterized by high unemployment.

Inflationary Gap

A situation where the current equilibrium output is greater than potential GDP ($YE > YP$), characterized by very low unemployment.

Self-Correcting Mechanism

The process by which changes in wages and input prices in response to surpluses or shortages return the economy to long-run equilibrium at potential GDP.

Say's Law

A classical economic principle stating that 'Supply creates its own demand,' implying the act of production generates the income necessary to purchase the goods.

Laissez-faire

A hands-off approach to the economy, emphasizing that markets will clear on their own without government intervention.

Sticky Wages

A Keynesian concept suggesting that wages and input prices are not flexible in the downward direction due to factors like minimum wage laws and unions.