ECN 211: Exam 2

Business Cycle

Alternating periods of economic growth and contraction, which can be measured by changes in real GDP

Peak

The phase of the business cycle in which real GDP reaches its maximum after rising during a recovery

Recession

A downturn in the business cycle during which real GDP declines, and the unemployment rate rises

Trough

The phase of the business cycle in which real GDP reaches its minimum after falling during a recession

Recovery

An upturn in the business cycle during which real GDP rises

Economic Growth

An expansion in national output measured by the annual percentage increase in a nation’s real GDP

Leading Indicator

Variables that change before real GDP changes

Coincident Indicator

Variables that change at the same time real GDP changes

Lagging Indicator

Variables that change after real GDP changes

Unemployment Rate

The percentage of people in the civilian labor force who are without jobs and are actively seeking jobs for 4 weeks

Employed

A person who works at least 1 hour per week for pay or at least 15 hours per week as an unpaid worker in a family business

Unemployed

A person who does not have a job but has looked for work in the last month (to be counted among this group you must be part of the civilian labor force and actively seeking a job)

Civilian Labor Force

The number of people 16 years of age and older who are employed or who are actively seeking a job, excluding armed forces, homemakers, discouraged workers, and other people not in the labor force

Discouraged Worker

A person who wants to work, but who has given up searching for work because they believe there will be no job offers

Frictional Unemployment

Temporary unemployment caused by the time required of workers to move from one job to another

Structural Unemployment

Unemployment caused by a mismatch of the skills of workers out of work and the skills required for existing job opportunities

Cyclical Unemployment

Unemployment caused by the lack of jobs during a recession

Full Unemployment (Natural Rate of Unemployment)

The situation in which an economy operates at an unemployment rate equal to the sum of the frictional and structural unemployment rates

GDP Gap

The difference between actual real GDP and potential or full employment real GDP

Participation Rate

Actively involved in the population group

National Income Accounting

The system used to measure the aggregate income and expenditures for a nation

Gross Domestic Product (GDP)

The market value of all final goods and services produced in a nation during a period of time

Final Goods

Finished goods and services produced for the ultimate user

Intermediate Goods

Goods and services used as inputs for the production of final goods

Circular Flow Model

A diagram showing the exchange of money, products, and resources between households and businesses

Flow

A rate of change in a quantity during a given time period

Stock

A quantity measured at one point in time

Expenditure Approach

The national income accounting method that measures GDP by adding all the spending for final goods during a period of time

Personal Consumption Expenditures

Household spending for durable goods, nondurable goods, and services

Durable Goods

Anything that lasts beyond three years

Nondurable Goods

Anything considered used up or consumed in less than three years

Services

Any transaction not in the form of a tangible object

Gross Private Domestic Investment

The national income account that includes “gross” (all) “private” (not government) “domestic” (not foreign) spending by businesses for investment in capital assets that are expected to earn profits in the future

Government Spending

The value of goods and services government at all levels purchased measured by their costs

Net Exports

The difference between exports and imports

Exports

Spending by foreigners for U.S. domestically produced goods

Imports

The dollar amount of U.S. purchases for goods produced abroad

Income Approach

The national income accounting method that measures GDP by adding all incomes during a period of time, including compensation of employees, rents, net interest, and profits

Compensation of Employees

Income earned from wages, salaries, and certain supplements paid by firms and government to suppliers of labor

Rental Income

Rent and royalties received by property owners who permit others to use their assets during a time period

Proprietors’ Income

All forms of income earned by unincorporated businesses

Corporate Profits

All income earned by stockholders of corporations regardless of whether stockholders receive it

Net Interest

The different between interest income earned and interest payments

Depreciation

An allowance for the portion of capital worn out producing GDP

National Income (NI)

The total income earned by resource owners, including wages, rents, interest, and profits

Personal Income (PI)

The total income received by households that is available for consumption, saving, and payment of personal taxes

Disposable Personal Income (DI)

The amount of income that households actually have to spend or save after payment of personal taxes

Nominal GDP

The value of all final goods based on the prices existing during the time period of production

Real GDP

The value of all final goods produced during a given time period based on the prices existing in a selected base year

GDP Deflator

A measure that compares changes in the prices of all final goods during a given year relative to the prices of those goods in a base year

Indirect Business Taxes

Taxes levied as a percentage of the prices of goods sold and therefore collected as part of the firm’s revenue (income to the government)