Macroeconomics: Output, Economic Growth, Unemployment, and Inflation

Vocabulary flashcards covering GDP measurement, the equation of exchange, institutions and economic growth, business cycles, employment metrics, and inflation indicators.

Stock (Financial)

Ownership of businesses, bought and sold in the stock market, whose prices fluctuate based on the expected future profitability of businesses.

Flow

The rate of change in a stock over a given period of time.

Equation of Exchange (Version 1)

The macroeconomic identity expressed as $M \cdot V = P \cdot Y$, where $M$ is the money supply, $V$ is the velocity of money, $P$ is the price level, and $Y$ is real output.

Equation of Exchange (Version 2)

The growth rate form of the equation of exchange, written as $\%\Delta M + \%\Delta V = \%\Delta P + \%\Delta Y$, linking money supply growth, velocity change, inflation, and economic growth.

Gross Domestic Product (GDP)

The market value of all final goods and services produced within a country over a year, calculated by summing prices times quantities.

Final Goods

Goods that have reached their last consumer as new goods; these are counted directly in GDP.

Intermediate Goods

Goods that go into the production of final goods; these are excluded from GDP calculations to avoid double counting.

Per Capita GDP

A country's total GDP divided by its total population.

National Spending Approach

The expenditure method for calculating GDP given by the formula $Y = C + I + G + NX$, where $C$ is consumption, $I$ is investment, $G$ is government spending, and $NX$ is net exports ($X - M$).

Nominal GDP

The value of GDP calculated using contemporaneous (current-year) prices.

Real GDP

The value of GDP calculated using constant base-year prices to correct for price changes.

Price Level

A stock variable that measures the overall level of prices and serves as an indicator of the cost of living.

Inflation

A flow variable defined as an increase in the overall price level.

Deflation

A flow variable defined as a decrease in the overall price level.

Disinflation

A flow of a flow defined as a decrease in the rate of inflation.

GDP Deflator

A price index measuring inflation across all domestically produced goods, calculated as $\frac{\text{Nominal GDP}}{\text{Real GDP}} \times 100$, which equals $100$ in the base year.

Economic Growth

An increase in real GDP per capita over time.

Rule of 72

A mathematical rule of thumb stating that if a variable is growing at an annual rate of $x\%$, it will double in approximately $\frac{72}{x}$ years.

Physical Capital

The tools, equipment, and machinery used to produce goods and services, which are subject to diminishing returns.

Human Capital

The knowledge, skills, and training embodied in workers.

Institutions

The foundational structures—such as secure property rights, the rule of law, competitive markets, open trade, and low regulation—that shape economic incentives and drive sustained economic growth.

Labor Force

The total number of people in an economy who are either employed or actively seeking employment (unemployed).

Labor Force Participation Rate

The percentage of the civilian noninstitutionalized adult population ($16+$) that is in the labor force, calculated as $\frac{\text{Labor Force}}{\text{Noninstitutionalized Population}} \times 100\%$.

Unemployment Rate

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

Discouraged Workers

Individuals who desire a job but have stopped actively looking for one, removing them from the labor force and leading the unemployment rate to understate joblessness.

Frictional Unemployment

Short-term unemployment caused by the normal difficulties, delays, and time required for workers to search for and find matching jobs.

Structural Unemployment

Persistent unemployment caused by a mismatch between the skills workers possess and the skills demanded by employers as economic structures or technologies evolve.

Seasonal Unemployment

Unemployment resulting from regular, predictable fluctuations in labor demand tied to seasons of the year.

Cyclical Unemployment

Unemployment correlated with fluctuations in the business cycle, rising during recessions and falling when recessions end.

Natural Rate of Unemployment

The benchmark unemployment rate prevailing in the absence of cyclical fluctuations, calculated as structural unemployment plus frictional unemployment.

Potential GDP

The level of real GDP achieved when cyclical unemployment is zero and the economy operates at full employment.

Consumer Price Index (CPI)

A retail price index that measures inflation by tracking the monthly cost of a fixed market basket of goods and services purchased by a typical household.

Producer Price Index (PPI)

A wholesale price index that measures inflation by calculating changes in the selling prices received by domestic producers for their output.

Menu Costs

The direct economic costs businesses incur when updating, reprinting, or changing posted prices in response to inflation.

Money Illusion (Price Confusion)

A condition in which people confuse changes in nominal prices with changes in real prices, causing them to make costly misallocations of economic resources.