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Modern economic growth
Rising living standards due to increased output within a generation
Demand shocks
Unexpected changes in the demand for goods and services
Intermediate goods
Products purchased for resale or further processing or manufacturing
Value added
Market value of a firm's output less the value of the inputs the firm has bought from others
Financial transactions
Excluded from GDP, including public and private transfer payments and stock market transactions
Secondhand sales
Already counted when sold as new
Expenditures approach
Sum of all money spent in buying goods and services
Government purchases
Expenditures for goods and services government consumes, expenditures for publicly owned capital, and government expenditures on R&D
Net exports
Value of exports minus imports
Income approach
Income derived from creating a product
Rents
Income received by households and businesses that supply property resources
Interest
Money paid by private business to suppliers of loans and interest received by households on CDs and bonds
Profits
Earnings of businesses
Corporate profits
Earnings of corporations
Corporate income taxes
Taxes levied on corporations
Dividends
Part of after-tax profits corporations pay to stockholders
Undistributed corporate profits
After-tax profits not distributed to shareholders
Taxes on production and imports
General sales tax, customs duties, and business property tax
Net domestic product
GDP adjusted for depreciation
Personal income
All income received by individuals
Disposable income
Personal income minus taxes
Price index
Measure of the price of a collection of goods and services in a given year compared to a reference year
Economic growth
Increase in real GDP occurring over some time period
GDP per capita
Real GDP divided by population
Rule of 70
Shows how long a variable takes to double
Culture
Vast increases in wealth and living standards have allowed ordinary people to have significant time for leisure activities and the arts
Social
Countries have abolished feudalism, instituted universal public education, and largely eliminated ancient social norms and restrictions
Political
Tendency to move toward democracy, which was rare before the industrial revolution
Average lifespan
Has more than doubled from 30 years to 67 years
Strong property rights
Structures that promote modern economic growth
Patents and copyrights
Structures that promote modern economic growth
Efficient financial institutions
Structures that promote modern economic growth
Free trade
Allows countries to produce output at lowest opportunity cost and facilitates the cross-border transfer of innovations
Competitive market system
Prices and profits indicate what and how much to produce
Supply factors
Factors that increase the potential size of the economy's GDP
Demand factor
Necessity for households, government, and businesses to increase purchases of goods and services to provide a market for new output
Efficiency factor
Necessity for the economy to achieve economic efficiency and full employment
Productive efficiency
Least costly way of producing goods and services
Allocative efficiency
Production of the right amounts of goods and services
Labor and productivity
Increasing real output and income by increasing inputs of resources and raising the productivity of those inputs
Real GDP
Hour of work multiplied by labor productivity
Growth accounting
Assesses the supply side elements that contribute to changes in real GDP
Technological advance
Accounts for 40% of productivity growth
Education and training
Accounts for 15% of productivity growth
Human capital
Knowledge and skills that make a worker productive
Economies of scale and resource allocation
Accounts for 15% of productivity growth
Increasing returns
Percentage increase in inputs leads to an even larger percentage increase in output
Business Cycle
Four phases: peak, recession, trough, expansion
Irregular innovation
Significant new products or methods
Productivity changes
Unexpected increases or decreases in productivity
Political events
Treaties, wars, or other political changes
Financial instability
Financial bubbles or bursts that spread to the rest of the economy
Consumer durables
Cars, computers, refrigerators
Nondurable consumer goods
Service-oriented goods somewhat insulated from recession
Unemployment
Percentage of the labor force without a job
Frictional unemployment
Unemployment due to searching for or waiting to take jobs
Cyclical unemployment
Unemployment caused by a decline in total spending
Full employment
Occurs when there is no cyclical unemployment
GDP gap
Difference between actual GDP and potential GDP
Okun's Law
For every 1% point actual unemployment is above the natural rate, a negative GDP gap of about 2% occurs
Inflation
Rise in the general level of prices
Demand-pull inflation
Caused by excess demand bidding up prices
Cost-push inflation
Caused by factors that raise per unit production costs
Core inflation
Underlying increases in the CPI after removing volatile food and energy prices
Nominal income
Number of dollars received as wages, rent, interest, or profit
Real income
Purchasing power of nominal income adjusted for inflation
unemployment rate formula
unemployed/labor force x 100
Price Index Formula
nominal GDP/real GDP
Macroeconomics
Study of long run economic growth and short run fluctuations in output and employment
Recession
Period where output and living standards decline
Real GDP
Value of final goods and services produced within a country's borders, adjusted for comparison of different years
Unemployment
State of being unable to find a job despite actively seeking work
Inflation
Increase in overall level of prices
Saving
Occurs when current consumption is less than current output
Investment
Devotion of resources to increasing future output
Expectations
Anticipations of future events
Shocks
Situations where expectations differ from actual outcomes
Supply shocks
Unexpected changes in the supply of goods and services
Inventory
Supply of output that has not been sold yet
Short run
First few weeks and months after a demand shock
Long run
Extending from many months to several years after a demand shock
GDP
Monetary measure of the market value of final goods and services produced within a country
Final goods
Products purchased by their end user
Gross private domestic investment
All business capital, construction, changes in inventories, and money spent on research and development or creation of new art
Net private domestic investment
Includes only investment in the form of added capital
Compensation of employees
Income received by employees
Proprietors' income
Net incomes of sole proprietors, partnerships, and other unincorporated businesses
Quantity of Capital
Accounts for 30% of productivity growth
Structural unemployment
Unemployment due to a decline or disappearance of certain skills
GDP Gap Formula
actual GDP - potential GDP
GDP formula
Y=C+I+G+NX (GDP = Consumption + Investment + Government Spending + Net)
Growth Formula
(yr 2 - yr1)/yr1 X 100
Real GDP formula
(Nominal GDP/Price Index) x 100
GDP per capita
Real GDP/Population
demand-pull inflation
excess of total spending beyond the economy's capacity to produce.
cost-push inflation
rising prices in terms of factors that raise per unit of production costs.
Optimal Unemployment Rate
4-5%
Note 
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