Unit 2: Economic Indicators and the Business Cycle

Private Sector

the part of the economy that involves the transactions of individuals and businesses

Public Sector

the part of the economy that involves the transactions of the government

Factor Payments

the income people receive for supplying factors of production, such as land, labor, or capital

Transfer Payments

Benefits given by the government directly to individuals. Transfer payments may be either cash transfers, such as Social Security payments and retirement payments to former government employees, or in-kind transfers, such as food stamps and low-interest loans for college education.

Gross Domestic Product

The total value of goods and services produced within the borders of a country during a specific time period, usually one year.

GDP per capita

GDP divided by population

Capital Stock

the total amount of physical capital available in a country

Human Capital

the skills and knowledge gained by a worker through education and experience. The more educated a workforce, the better the human capital a country has

Expenditures Approach to GDP

GDP = C + I + G + (X-M)

Income Approach to GDP

GDP = all payments for resources used to produce output in the nation during the year added together

GDP = W (Wages) + R (Rent) + I (Interest) + P (Profit)

Consumption

spending by households on goods and services, with the exception of purchases of new housing

Investment

spending on capital equipment, inventories, and structures, including household purchases of new housing

Government Spending

spending by all levels of government on final goods and services

Net Exports

exports - imports

final goods and services

goods and services produced for final use

intermediate goods and services

goods and services bought from one firm by another firm to be used as inputs into the production of final goods and services

Unemployment

Measures the number of people who are able to work, but do not have a job during a period of time.

Unemployment Rate

the percentage of the labor force that is unemployed

(#unemployed/#labor force)X100

Labor Force

the total number of workers, including both the employed and the unemployed

labor force participation rate

the percentage of the adult population that is in the labor force

(#labor force/#adult population) X100

Frictional Unemployment

unemployment that occurs when people take time to find a job

structural unemployment

unemployment that occurs when workers' skills do not match the jobs that are available

cyclical unemployment

unemployment that rises during economic downturns and falls when the economy improves

Natural Rate of Unemployment

the unemployment rate that arises from the effects of frictional plus structural unemployment

full employment output

the level of output that results when the labor market is in equilibrium and the economy is producing at full employment

Discouraged Workers

individuals who would like to work but have given up looking for a job

underemployed workers

those who have part-time jobs but who would prefer to work full-time

Inflation

A general and progressive increase in prices

Deflation

a decrease in the general level of prices

Disinflation

a reduction in the rate of inflation

Inflation Rate

the percentage increase in the price level from one year to the next

(New-Old/Old) X100

Consumer Price Index (CPI)

a measure of the overall cost of the goods and services bought by a typical consumer that helps to measure inflation

Shoe Leather Costs

the increased costs of transactions caused by inflation

Menu Costs

the costs of changing prices due to inflation

Unit of Account Costs

arise from the way inflation makes money a less reliable unit of measurement

Nominal

not adjusted for inflation

Real

adjusted for inflation

Nominal Wage

the wage measured in current dollars; the dollar amount on a paycheck

Real Wage

the wage earned adjusted for inflation - the actual purchasing power of a wage

Nominal GDP

the production of goods and services valued at current prices

Real GDP

the production of goods and services valued at constant prices

GDP Deflator

Nominal GDP/Real GDP x 100

Business Cycle

Alternating periods of economic expansion and economic recession

Product Market

where consumers exchange goods and services with producers

Resource Market

where businesses purchase the resources they need to make the goods consumers demand

Income Approach (GDP)

measures GDP using the total income earned through the factors of production (W+R+I+PR)

Wages (W)

payments for labor

Rent (R)

payments for land

Interest (I)

payments for capital goods

Profit (PR)

payments for entrepreneurship

seasonal unemployment

unemployment that occurs during times of the year when the demand for certain types of labor is low

Recession

periods of contraction

Expansion

a phase of increased employment, economic growth, and pressure for price increases

Peak

the maximum growth stage in an economy (the end of expansion, beginning of contraction)

Contraction

phase characterized by increasing unemployment, decreasing economic activity, and declining economic output

Trough

Lowest point of economic decline, when real GDP stops falling (the end of contraction, beginning of expansion, also called recovery)

Depression

a really long recession

Output Gap

the difference between an economy's actual output and their potential output

Actual Output

current output in an economy

Potential Output

how much the economy should produce if all resources are allocated efficiently