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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.
