Macroeconomics: Key Concepts, the Circular Flow, and National Output Measurement

Flashcards defining core macroeconomic terminology, national income accounting, business cycle phases, and circular flow components based on Chapters 20 and 21 lecture notes.

Aggregate output

The total quantity of goods and services produced in an economy in a given period, serving as the main measure of economic performance.

Business cycle

The short-term ups and downs in aggregate output over time, consisting of expansions from troughs to peaks and recessions from peaks to troughs around a trend growth line.

Positive trend

A pattern in which the peak (highest point) of a new business cycle is higher than the peak of the previous cycle.

Expansion (or boom)

The period in the business cycle extending from a trough (bottom of the cycle) to a peak, during which output and employment grow.

Recession (contraction/slump)

The period in the business cycle extending from a peak to a trough, during which output and employment fall.

Depression

A prolonged and deep recession.

Unemployment rate

The percentage of the labor force that is unemployed, serving as a key indicator of economic health that is reported monthly by the government.

Inflation

An increase in the overall price level across the economy.

Hyperinflation

A period of very rapid increases in the overall price level.

Deflation

A decrease in the overall price level across the economy.

Circular flow diagram

A visual model illustrating the income received and payments made among four major economic groups: households, firms, the government, and the rest of the world.

Transfer payments

Payments from the government to households for which recipients do not supply goods, services, or labor, such as Social Security benefits and assistance to the needy.

Leakage

A term applied to household saving because it withdraws income or current purchasing power from the circular flow of spending.

Goods-and-services market

The market arena where households, the government, and firms demand final goods and services supplied by firms and the rest of the world.

Corporate bonds

Debt securities issued by corporations to raise money for business operations, expansions, acquisitions, or debt refinancing.

Interest rate

The rate charged on a given loan reflecting the loan duration and the perceived risk to the lender.

Labor market

The market arena where firms and the government purchase labor supplied by households.

Money market (financial market)

The arena where households supply funds by purchasing stocks and bonds in expectation of dividends and interest, and where firms, households, and governments borrow funds.

Bond

A fixed-income financial security representing a loan made by an investor to a borrower, such as a corporation or government.

Share of stock

A financial instrument giving the holder an ownership share in a corporation and the right to share in its profits.

Capital gain

An increase in the market value of an asset, such as a stock, above its initial purchase price.

Fiscal policy

Government policy decisions regarding how much to tax and spend to influence economic activity.

Expansionary fiscal policy

A fiscal policy approach in which taxes are cut or government spending is increased to stimulate the economy.

Contractionary fiscal policy

A fiscal policy approach in which taxes are increased or government spending is cut to reduce aggregate demand.

Monetary policy

Policy conducted in the United States by the Federal Reserve, which manages the money supply and controls short-term interest rates.

Great Depression

A severe economic contraction and period of high unemployment beginning in 1929 and extending through the 1930s, during which U.S. unemployment remained above $14\%$ until 1940.

Employment Act of 1946

Legislation that established the President's Council of Economic Advisors and committed the federal government to intervening in the economy to prevent large drops in output and employment.

Stagflation

An economic condition characterized by high inflation, high unemployment, and slow or negative output growth.

Value added

The difference between the value of goods as they leave a specific stage of production and the cost of the goods as they entered that stage.

Gross Domestic Product (GDP)

The total market value of all final goods and services produced within a given period by factors of production located within a country.

Intermediate goods

Goods produced by one firm for use in further processing or resale by another firm, which are excluded from direct GDP calculation to prevent double counting.

Gross National Product (GNP)

A measure of the total output produced by factors of production owned by a country's citizens, regardless of where that production physically takes place.

Expenditure approach

A method of computing GDP by summing the total amount spent on all final goods and services by households, firms, the government, and the rest of the world during a given period.

Income approach

A method of computing GDP by summing the income (wages, rents, interest, and profits) received by all factors of production in producing final goods and services.

Personal consumption expenditures ($C$)

The largest component of GDP, representing consumer spending on durable goods, nondurable goods, and services.

Gross private domestic investment ($I^a$)

Total expenditures by firms and households on newly produced capital goods, including plant, equipment, inventory, and new residential structures.

Durable goods

Goods that last a relatively long time, such as automobiles, furniture, and household appliances.

Nondurable goods

Goods that are used up fairly quickly, such as food, clothing, and gasoline.

Services

Consumer purchases that do not involve the production of physical items, such as payments for doctors, lawyers, and educational institutions.

Residential investment

The component of gross investment consisting of expenditures for new houses and apartment buildings.

Nonresidential investment

The component of gross investment consisting of expenditures by firms for machines, tools, plants, and other commercial facilities.

Change in business inventories

The amount by which firms' inventories of unsold goods change during a given period, counted as investment because inventories provide future value.

Depreciation

The amount by which an asset's capital value falls each period as equipment and machinery wear out during production.

Net investment

A measure of how much the stock of capital changes during a period, calculated as gross investment minus depreciation ($\text{capital}_{\text{end of period}} = \text{capital}_{\text{beginning of period}} + \text{net investment}$).

Government consumption and gross investment ($G$)

Expenditures by federal, state, and local governments for final goods and services (excluding transfer payments).

Net exports ($EX - IM$)

The difference between exports (domestically produced goods and services sold abroad) and imports (domestic purchases of goods and services produced foreignly).

National income

The total income of a country earned by factors of production owned by its citizens, calculated as the sum of eight income items.

Net National Product (NNP)

Gross National Product (GNP) minus depreciation.

Disposable personal income

The income remaining for households to spend or save after paying personal income taxes ($\text{personal income} - \text{personal income taxes}$).

Personal saving rate

The percentage of disposable personal income that households save rather than spend during a given period.

Nominal GDP

Gross Domestic Product measured in current dollars, with all output valued at current market prices.

Real GDP

Gross Domestic Product that has been adjusted for changes in the overall price level by evaluating output at constant base-year prices.

GDP deflator

A comprehensive measure of the overall price level derived from the ratio of nominal GDP to real GDP.