Macroeconomics: Chapter 5 - The Wealth of Nations

Flashcards covering the definitions and measurement of macroeconomic aggregates including GDP, GNP, CPI, and employment metrics from Chapter 5.

Macroeconomics

The study of economic aggregates and economy-wide phenomena like the annual growth rate of a country’s total economic output or the annual percentage increase in the total cost of living.

National income accounting

A framework for calculating gross domestic product (GDP), which is a measure of aggregate economic output.

Income per capita

The average income per person, calculated by dividing a nation’s aggregate (or total) income by the number of people in that country.

Recession

Defined as two straight quarters in which aggregate income falls.

Unemployment rate

The ratio of workers without a job who are actively seeking one, divided by the labor force.

National Income and Product Accounts (NIPA)

The system of national income accounts used in the United States.

Gross Domestic Product (GDP)

The market value of final goods and services produced within the borders of a country during a particular time period.

Production approach

A method of measuring GDP that sums up each firm’s value added.

Value added

A firm’s sales revenue minus the firm’s purchases of intermediate products from other firms.

Expenditure approach

A method of measuring GDP that sums up the purchases of goods and services by households (C), firms (I), government (G), and the foreign sector (X-M).

Income approach

A method of measuring GDP that sums up payments (or income) received by labor and the owners of physical or financial capital.

Consumption (C)

Consumption goods and consumption services bought by domestic households.

Investment (I)

New physical capital bought by domestic households and domestic firms.

Government expenditures (G)

Government expenditures on goods and services.

Exports (X)

Exports of goods and services produced domestically and sold abroad.

Imports (M)

Imports of goods and services produced abroad and sold domestically.

National Income Accounting Identity

$$Y = C + I + G + X - M$$

Aggregate Accounting Identity

$$Y = \text{GDP}_{\text{PROD}} = \text{GDP}_{\text{EXP}} = \text{GDP}_{\text{INCOME}}$$

Saving Formula

$$Saving = I + X - M$$

Gross National Product (GNP)

A record of production of domestically owned labor and capital in the United States and abroad.

Nominal GDP

The total value of production using current market prices to determine the value of each unit that is produced.

Real GDP

The total value of production using market prices from a specific base year to determine the value of each unit that is produced.

GDP Deflator

The ratio of nominal GDP to real GDP, used to measure how prices of goods and services produced in a country have risen since the base year.

Consumer Price Index (CPI)

The cost of buying a basket of goods and services in the current year divided by the cost of the same basket in the base year.

Inflation rate

The percentage change in a price index.