Chapter 8 – Gross Domestic Product (GDP) and Related Economic Measures

These flashcards cover key vocabulary and concepts related to Gross Domestic Product (GDP), unemployment, inflation, and the financial system, derived from the lecture notes.

Gross Domestic Product (GDP)

Measures the market value of all final goods and services produced within a country’s borders during a specific time period. It is commonly calculated via the expenditure approach as GDP = C + I + G + NX.

Final goods/services

Goods that are bought by the end-user; intermediate goods are excluded to avoid double counting.

Production approach

A method of calculating GDP by measuring total output produced.

Income approach

A method of calculating GDP by measuring total income earned.

Consumption (C)

The largest component of GDP, representing household spending on durable goods (e.g., cars), nondurable goods (e.g., food), and services (e.g., healthcare).

Investment (I)

Refers to spending by firms on new capital (business fixed investment), household spending on new housing (residential investment), and changes in business inventories (inventory investment).

Government Purchases (G)

Spending by federal, state, and local governments on goods and services (e.g., infrastructure, defense) that excludes transfer payments (e.g., social security) because transfer payments do not represent new production.

Net Exports (NX)

Calculates the difference between exports (goods/services produced domestically and sold abroad) and imports (goods/services produced abroad and sold domestically), thus determining the net foreign spending on domestic output: NX = Exports - Imports.

Nominal GDP

GDP calculated using current year prices, reflecting both changes in quantity and price level.

Real GDP

GDP adjusted for inflation, using base year prices, to measure changes in the actual quantity of goods and services produced, allowing for better comparison of output over time.

GDP Deflator

A measure of the overall price level of all new, domestically produced final goods and services, calculated as \frac{\text{Nominal GDP}}{\text{Real GDP}} \times 100. It reflects the prices of goods and services included in GDP.

Unemployment Rate (UR)

The percentage of the labor force that is unemployed, calculated as \frac{\text{Number of Unemployed}}{\text{Labor Force}} \times 100.

Labor Force Participation Rate (LFPR)

The percentage of the working-age population (typically 16 years or older, non-institutionalized) that is part of the labor force, calculated as \frac{\text{Labor Force}}{\text{Working-Age Population}} \times 100.

Frictional Unemployment

Temporary unemployment occurring when individuals are voluntarily moving between jobs, searching for new jobs, or entering the workforce for the first time. It is a natural part of a healthy economy.

Structural Unemployment

Long-term unemployment resulting from a mismatch between the skills workers possess and the skills demanded by employers, often due to technological changes or shifts in industry.

Cyclical Unemployment

Unemployment caused by business cycle fluctuations, specifically during economic downturns or recessions when there is insufficient aggregate demand for labor.

Natural Rate of Unemployment (NRU)

The unemployment rate that would exist in a healthy economy when it is producing at its potential output. It consists only of frictional and structural unemployment, as cyclical unemployment is zero at this rate.

Consumer Price Index (CPI)

Measures the average change over time in the prices paid by urban consumers for a fixed basket of consumer goods and services, calculated as \frac{\text{Cost of BasketToday}}{\text{Cost of Basketin Base Year}} \times 100.

Inflation Rate

The percentage change in the price level (e.g., CPI or GDP Deflator) from one period to another, typically calculated as \frac{\text{Current Period Price Index - Previous Period Price Index}}{\text{Previous Period Price Index}} \times 100.

Indexation

Adjusting payments/wages/contracts for inflation.

Real Interest Rate

The nominal interest rate adjusted for inflation, reflecting the true cost of borrowing and the true return on saving. Approximated by the Fisher Equation: Real\; Interest\; Rate \approx Nominal\; Interest\; Rate - Inflation\; Rate.

Long-Run Economic Growth

Sustained increases in real GDP per capita over an extended period, leading to a higher standard of living and increased productive capacity of an economy.

Output Gap

The difference between actual GDP (the observed level of economic output) and potential GDP (the maximum sustainable output an economy can produce), indicating whether an economy is operating above or below its full capacity.

Potential GDP

The maximum quantity of real GDP that an economy can produce when it is at full employment, meaning all available resources (labor, capital, land, entrepreneurship) are utilized efficiently and sustainably.