ECO 232 Exam 2 Review: Macroeconomics

Vocabulary practice flashcards covering Chapters 6 through 9 of ECO 232: GDP, Economic Growth, Unemployment, and Inflation.

Components of GDP Demanded

The four main expenditure categories that make up gross domestic product on the demand side: consumption, investment, government spending, and net exports.

Components of GDP Produced

The categories of output measured on the supply side of gross domestic product: durable goods, nondurable goods, services, structures, and the change in inventories.

Double Counting

A measurement mistake where manufacturing inputs are counted along with the final product, resulting in a reported GDP that is higher than actual production.

Nominal Measure

A series of economic data over time that allows the value of the currency to fluctuate rather than holding it constant.

Real Measure

A series of economic data over time that keeps the value of the currency constant in order to accurately reflect actual price changes.

Nominal to Real Conversion Formula

The formula used to convert nominal data to real data using a base year price level: $\text{Real Value} = \frac{\text{Nominal Figure}}{\text{Price Level}} \times 100$.

Aggregate Production Function

A mathematical relationship that describes the total output of an entire economy based on various inputs such as capital, labor, and technology.

Capital Deepening

An economic condition where the amount of capital increases relative to the number of workers, enabling workers to become more productive.

Improvements in Technology

New machines or production techniques that improve the productivity of labor or serve as substitutes for labor.

Convergence

The economic hypothesis that poorer or developing economies will grow faster than developed ones due to diminishing marginal returns on education and capital, eventually narrowing the income gap.

Unemployed

The official classification of a person who does not have a job, is part of the labor force, and is actively trying but unable to find work.

Out of the Labor Force

The classification of adults who are neither working nor actively looking for work, such as retirees and full-time students.

Unemployment Rate

The percentage of the labor force without work, calculated as: $\frac{\text{Number of Unemployed People}}{\text{Labor Force}}$.

Labor Force Participation Rate

The percentage of the adult population that is either employed or unemployed, calculated as: $\frac{\text{Labor Force}}{\text{Total Population}}$.

Discouraged Workers

Individuals who have stopped searching for work and are therefore reclassified from unemployed to out of the labor force, lowering both the unemployment rate and the labor force participation rate.

Sticky Wages

The economic tendency for wages to adjust slowly, particularly downwards, due to explicit contractual obligations and worker resistance to pay cuts.

Natural Rate of Unemployment

The baseline level of unemployment that exists even when the economy is healthy, determined primarily by frictional and structural forces.

Frictional Unemployment

The temporary unemployment that occurs during the period when workers are transitioning from one job to another or searching for new careers.

Structural Unemployment

A form of unemployment caused by a mismatch between the skills workers possess and the specific skills demanded by employers in the economy.

Cyclical Unemployment

Unemployment directly linked to the macroeconomic business cycle, rising during economic contractions and falling during expansions.

Basket of Goods and Services

A representative collection of specific items tracked over time to measure price level movements and evaluate the costs faced by consumers or producers.

Price Level

A gauge of overall prices throughout the economy at a specific point in time, commonly tracked using index numbers.

Rate of Inflation

The percentage rate of change in the overall price level from one period to another.

Substitution Bias

An upward bias in a fixed-basket inflation index caused by the assumption that consumers do not switch to cheaper alternative goods when prices rise.

Quality/New Goods Bias

An upward bias in inflation measurements that occurs when price increases caused by product improvements and higher quality are miscalculated as pure price increases.

Deflation

A general decrease in the overall price level across an economy, which corresponds to an increase in the purchasing value of currency.

Indexing

A system where payments, wages, or government benefits automatically adjust at the same rate as inflation to maintain purchasing power.

GDP Deflator

A comprehensive price index covering all goods and services produced in the entire economy, commonly used to convert nominal GDP to real GDP.