Macroeconomics Chapters 6–10: GDP, Growth, Unemployment & Inflation

Business Cycle

Alternating increases and decreases in economic activity over time, consisting of peaks, recessions, troughs, and expansions.

Real GDP

Gross domestic product adjusted for inflation; measures the total value of final goods and services produced using constant base-year prices.

Nominal GDP

Gross domestic product measured in terms of the current market prices that prevailed when the output was produced.

Demand Shocks

Unexpected events that change the demand for goods and services, forcing firms to adjust prices or quantities sold.

Supply Shocks

Unexpected events that change the per-unit production costs and aggregate supply in an economy.

Sticky Prices

Prices that are inflexible or slow to adjust ('sticky') downward in the short run, causing demand shocks to result in fluctuations in output and employment rather than immediate price changes.

Gross Domestic Product (GDP)

The total market value of all final goods and services produced within a country's borders during a specific period.

Expenditures Approach (GDP Formula)

GDP=C+Ig+G+Xn (Personal Consumption Expenditures + Gross Private Domestic Investment + Government Purchases + Net Exports).

Income Approach

Measuring GDP by summing the income derived from production, including employee compensation, rents, interest, proprietor's income, corporate profits, and taxes on production/imports.

Value Added

The market value of a firm's output minus the value of the inputs the firm has purchased from other firms, used to avoid multiple counting.

Net Private Domestic Investment (In)

Gross investment minus depreciation (consumption of fixed capital); measures the net addition to the economy's stock of capital.

Shortcomings of GDP

Excludes nonmarket activities (e.g., homemaking, volunteer work), leisure, the underground economy, environmental quality, and does not account for income distribution or product quality improvements.

Economic Growth

An increase in real GDP or real GDP per capita occurring over a period of time.

Rule of 70

A mathematical formula (Years to Double=70÷Annual Growth Rate percentage) used to determine how long it takes for real GDP (or any variable) to double.

Labor Productivity

Total real output divided by the quantity of labor employed (output per worker per hour).

Institutional Structures of Growth

Frameworks that promote growth, including strong property rights, patents/copyrights, efficient financial institutions, free trade, literacy/education, and a competitive market system.

Supply Factors of Growth

Physical and technical agents of growth, including increases in the quantity/quality of natural and human resources, the stock of capital goods, and technology.

Labor Force

The total number of people who are either employed or actively looking for and able to work (unemployed).

Labor Force Participation Rate

The percentage of the working-age population that is actually in the labor force.

Frictional Unemployment

Workers who are temporarily between jobs, searching for new jobs, or waiting to start a job soon.

Structural Unemployment

Unemployment caused by changes in technology or consumer demand that permanently mismatch worker skills with available job openings.

Cyclical Unemployment

Unemployment caused by the recession phase of the business cycle (insufficient aggregate demand).

Natural Rate of Unemployment (NRU)

The full-employment rate of unemployment consisting only of frictional and structural unemployment (cyclical unemployment is zero).

GDP Gap Formula

GDP Gap=Actual GDP−Potential GDP (can be positive or negative).

Okun's Law

For every 1% that actual unemployment exceeds the natural rate of unemployment, a negative GDP gap of roughly 2% is created.

Consumer Price Index (CPI)

A primary measure of inflation that tracks the price of a market basket of goods and services purchased by a typical urban consumer.

Demand-Pull Inflation

Inflation driven by an excess of total spending (aggregate demand) relative to the economy's productive capacity.

Cost-Push Inflation

Inflation driven by a rise in per-unit production costs, often resulting from negative supply shocks.

Core Inflation

Inflation calculated by excluding highly volatile food and energy prices from the overall price index to reveal underlying long-term trends.

Fisher Equation

Nominal Interest Rate=Real Interest Rate+Inflation Premium (expected inflation).

Marginal Propensity to Consume (MPC)

The fraction of a change in disposable income that is spent on consumption (ΔC/ΔDI).

Marginal Propensity to Save (MPS)

The fraction of a change in disposable income that is saved (ΔS/ΔDI). Note: MPC+MPS=1.

Average Propensity to Consume (APC)

The fraction of total disposable income that is consumed (C/DI).

Average Propensity to Save (APS)

The fraction of total disposable income that is saved (S/DI). Note: APC+APS=1.

Spending Multiplier

The ratio of a total change in real GDP to the initial change in spending; calculated as 1/MPS or 1/(1−MPC).

Paradox of Thrift

The idea that when households collectively try to save more during economic hard times, total spending drops, which lowers real GDP and ultimately leaves total savings unchanged or lower.