Economics: GDP, Unemployment, Inflation, and Business Cycles

Gross Domestic Product (GDP)

Aggregate value of all final goods and services produced within the borders of the U.S. over a specific period of time (usually one year).

Monetary Measure

Done in dollars and cents.

Standard of Living

Linked to GDP as it shows a nation's value and production.

Real GDP

GDP value when inflation is removed from prices.

Nominal GDP

GDP value in current day prices.

True Measure of Output

Real GDP provides a true measure of output for a nation.

Per Capita Real GDP

Amount of output or value per person in a nation (GDP per person).

Approximate Worth per Person

Shows approximate worth per person calculated as Real GDP divided by population.

Tracking Economic Growth

Per Capita Real GDP is used to track economic growth.

Calculating GDP

Does not include second hand sales, intermediate goods, non-production transactions, non-market transactions, financial transactions, and transfer payments.

Income Approach

One of the two approaches to calculating GDP.

Expenditure Approach

A way of calculating GDP that focuses on different types of spending by different economic entities.

Consumer Spending

Spending by households.

Investment Spending

Spending by businesses.

Government Spending

Spending on infrastructure or defense.

Net Exports

Defined as exports minus imports.

GDP Formula

C + G + I + Xn = GDP.

Unemployment (Recession)

When real GDP is declining for six consecutive months.

Unemployment Rate

A measure of those people who are out of work, over the age of 16 and actively looking for a job.

Labor Force

People who are actively seeking employment and qualified to be counted as economic participants.

Labor Force Participation Rate

(Labor Force / Population) x 100.

Unemployment Rate Formula

(number of unemployed / labor force) x 100.

Full Employment

Considered any unemployment level under 5%.

Frictional Unemployment

Mild unemployment.

Cyclical Unemployment

Corresponds to business cycle.

Structural Unemployment

Severe unemployment where new skills are needed.

Technological Unemployment

Unemployment caused by technological advancements.

Discouraged Workers

People who have given up looking for work and are thus not counted as unemployed.

Underemployment

When someone is working a job that requires less human capital than they have invested in.

Inflation

Rise in price level or devaluing of the dollar.

Purchasing Power

Loss of purchasing power will force consumers and businesses to purchase less.

Real values

Values that have had inflation removed from them and are an actual measure of buying power.

Nominal values

Values that are in current dollars and include price level increases.

Nominal Value

NOMINAL VALUE minus INFLATION RATE equals REAL VALUE.

Shoe Leather Costs

Increased transaction costs (Consumer costs) due to inflation.

Menu Costs

Cost of changing a listed price (business costs).

Unit of Account Costs

Cost of having a less reliable unit of measurement (standard of living cost).

Unanticipated Inflation

Can help borrowers but can severely hurt savers, lenders, and those on fixed incomes.

The Business Cycle

A graph tracking Real GDP that shows economic 'ups and downs' and can be used to help show trends and make predictions.

Growth (Business Cycle Stage)

GDP Real is rising, unemployment is falling, price level may be rising.

Peak (Business Cycle Stage)

High point of economic activity, inflation is a concern.

Contraction (Business Cycle Stage)

GDP Real is falling, unemployment is rising, price level may be falling.

Recession

Refers to two straight quarters (6 months) of contraction.

Trough (Business Cycle Stage)

Low point of economic activity, unemployment is a concern.

Macroeconomic Goals

1. Promote Economic Growth: Steady growth in Real GDP per Capita. 2. Limit Unemployment: Keep cyclical unemployment as close to 0 as possible. 3. Keep Prices Stable: Limit inflation and keep it below income growth rate.