MACRO

National income and product accounts (national accounts)

Keep track of the flows of money among different sectors of the economy.

Product markets

Where goods and services are bought and sold.

Consumer spending

Household spending on goods and services.

Factor markets

Where resources, especially capital and labor, are bought and sold.

Government spending

Total expenditures on goods and services by federal, state, and local governments.

Taxes

Required payments to the government.

Disposable income

Total amount of household income available to spend on consumption, equal to income plus government transfers minus taxes.

Government transfers

Payments that the government makes to individuals without expecting a good or service in return.

Private savings

Household’s disposable income that is not spent on consumption.

Financial markets

Channel private savings into investment spending and government borrowing.

Investment spending

Spending by firms on new productive physical capital, such as machinery and structures.

Exports

Goods and services sold to other countries.

Imports

Goods and services purchased from other countries.

Gross Domestic Product (GDP)

The total value of all final goods and services produced in the economy during a given year.

Expenditure approach

Calculates GDP by adding up aggregate spending on domestically produced final goods and services.

Income approach

Calculates GDP by adding up the total factor income earned by households from firms.

Value-added approach

Surveys firms and adds up their contributions to the value of final goods and services.

Final goods and services

Goods and services sold to the final, or end, user.

Intermediate goods and services

Goods and services bought from one firm by another firm to be used as inputs into production.

Net exports

The difference between the value of exports and the value of imports, denoted as (X-M).

Circular flow diagram

A simplified representation of the economy showing the flow of goods, services, and money.

Labor force participation rate

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

Unemployment rate

The percentage of the total number of people in the labor force who are unemployed.

Frictional unemployment

Unemployment due to the time workers spend in job search.

Structural unemployment

Unemployment that results when workers lack the skills required for the available jobs.

Cyclical unemployment

The deviation of the actual rate of unemployment from the natural rate.

Inflation

A rising overall price level.

Deflation

A falling overall price level.

Consumer Price Index (CPI)

Measures the cost of the market basket of a typical urban American family.

Producer Price Index (PPI)

Measures the prices of goods and services purchased by producers.

Nominal GDP

The total value of all final goods and services produced in the economy during a given year, calculated with current prices.

Real GDP

The total value of all final goods and services produced in the economy, adjusted for changes in price level.

Business cycle

The alternation between economic downturns (recession) and economic upturns (expansions).

Potential output

What an economy can produce when operating at maximum sustainable employment.

Output gap

The difference between actual and potential output.

Market basket

A hypothetical set of consumer purchases of goods and services, used to compute price indices.

Natural rate of unemployment

The lowest possible level of unemployment that can exist in an economy, factoring in frictional and structural unemployment.