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Imports
Goods and services bought domestically but produced in other countries.
Exports
Goods and services produced domestically but sold in other countries.
Net exports
Exports minus imports.
Opportunity cost
The cost of forgoing the next best alternative when making a decision.
Comparative advantage
The ability of a country to produce a good at a lower opportunity cost than another country.
Specialization
The process where countries focus on producing goods where they have a comparative advantage.
Free Trade
Trade between countries that is without government restrictions.
Tariffs
Taxes imposed by a government on imports.
Import quotas
Numerical limits imposed unilaterally upon countries on the quantity of a good imported by one country from another country.
Effects of a tariff on ethanol
U.S. production rises from 3.0 billion to 4.5 billion gallons; U.S. consumption falls from 9.0 billion to 7.5 billion gallons; imports are reduced from 6.0 billion to 3.0 billion gallons.
Winners from international trade
Consumers in China and the U.S. who pay lower prices for wheat and smartphones; Chinese smartphone producers and their workers; U.S. wheat producers and their workers.
Losers from international trade
Chinese wheat producers and their workers due to less demand for their product.
Protectionist measures
Policies like tariffs and import quotas that governments implement to protect domestic industries from foreign competition.
Production possibilities table
A table showing the maximum possible output combinations of two goods that can be produced with available resources.
Trade agreement example
China trades 1 smartphone for 1 bushel of wheat, trading a total of 1,500 smartphones for 1,500 bushels of wheat.
Economic supplies
The total quantity of goods available in the market.
Area T
The area representing tariff revenues that goes to the U.S. government.
Labor hours in autarky
Each country has 1000 hours of labor available to produce smartphones and wheat.
Labor allocation
Each country devotes 250 hours to producing smartphones and 750 hours to producing wheat.
Consumer benefits
Chinese consumers have more money due to lower prices for wheat; U.S. consumers have more money due to lower prices for smartphones.
Demand increase
More demand for Chinese smartphones and U.S. wheat due to international trade.
Gross domestic product (GDP)
The market value of all final goods and services produced in a country during a period, typically one year.
Final good or service
A good or service purchased for final use by a consumer.
Intermediate goods and services
Inputs into another good or service, such as a tire on a truck.
GDP measures output
GDP measures output produced within a country's borders, regardless of the ownership of that production.
Government purchases
Include federal, state, and local government spending on goods and services, excluding transfer payments.
Net exports
Calculated as exports minus imports.
Household production
Goods and services people produce for themselves, which are not captured by GDP.
Example of GDP counting
If a carpenter makes and sells a bookcase, the value is counted in GDP; if made for personal use, it is not.
Shortcomings of GDP
GDP does not account for household production, such as services provided by a homemaker.
Concealment of production
Individuals and firms may conceal buying and selling, leading to underreporting in GDP.
Reasons for concealment
1. Dealing in illegal goods and services. 2. Avoiding taxes on income. 3. Avoiding government regulations.
Real GDP calculation example
Suppose we have a simple economy in which only 3 final goods and services are produced: eye exams, pizza, and shoes.
Production by U.S. firms
Production by a U.S. firm or a foreign firm counts equally in GDP if it occurs within U.S. borders.
Example of U.S. GDP inclusion
U.S. GDP includes the market value of Ford automobiles produced by an American-owned factory in Michigan.
Homemaker services
The value of services provided by a homemaker, such as caring for children and cleaning, is not included in GDP.
Impact of homemaker employment
If a homemaker works outside the home and hires services, GDP increases by the amount paid for those services.
Transfer payments
Payments that do not result in the immediate production of new goods and services and are excluded from GDP.
Illegal goods and services
Goods and services that are not reported in GDP due to their illegal nature.
Tax avoidance
Individuals may conceal income to avoid paying taxes, which leads to underreporting in GDP.
Government regulations
Individuals may conceal production to avoid compliance with government regulations.
Nominal GDP
The total market value of all final goods and services produced in a country in a given year, calculated using current prices.
Real GDP
The total market value of all final goods and services produced in a country in a given year, adjusted for inflation and using the prices from a base year.
GDP Deflator
A measure of the level of prices of all new, domestically produced, final goods and services in an economy.
Gross National Product (GNP)
The value of final goods and services produced by a country's residents, regardless of where the production occurs.
Labor Force
The sum of employed and unemployed workers in the economy.
Unemployment Rate
The percentage of the labor force that is unemployed.
Labor Force Participation Rate
The percentage of the working-age population that is in the labor force.
Working-Age Population
The total number of individuals who are eligible to work, including those in the labor force and those not in the labor force.
Discouraged Workers
Individuals who are available for work but have given up actively seeking employment due to the belief that no jobs are available.
Frictional Unemployment
Short-term unemployment that arises from the process of matching workers with jobs.
Structural Unemployment
Unemployment arising from a persistent mismatch between the skills and characteristics of workers and the requirements of jobs.
Cyclical Unemployment
Unemployment caused by a recession.
Full Employment
The condition in which all unemployment is frictional and structural, and cyclical unemployment is zero.
Natural Rate of Unemployment
The normal rate of unemployment, consisting of only frictional and structural unemployment.
Consumer Price Index (CPI)
A measure of the average prices that a typical urban family of four pays for the goods and services they purchase.
Inflation Rate
The rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power is falling.
CPI Calculation
CPI is calculated as the price of a basket of goods in the current year divided by the price of the same basket in the base year, multiplied by 100.
Ticket Price Inflation Example
In 1975, the average price of a ticket to an Atlanta Braves game was $4.01, and in 2023, it was $37.06.
CPI in 1975
The Consumer Price Index was 53.8.
CPI in 2023
The Consumer Price Index was 304.7.
GDP Calculation in 2017
Nominal GDP in 2017 is calculated by multiplying the price of each product in 2017 by the quantity produced in 2017 and summing the values.
GDP Calculation in 2025
Nominal GDP in 2025 is calculated by multiplying the price of each product in 2025 by the quantity produced in 2025 and summing the values.
Real GDP Calculation in 2025
Real GDP in 2025 is calculated by multiplying the price of each product in 2017 by the quantity produced in 2025 and summing the values.
