Unit 2: Economic Indicators & The Business Cycle

GDP

Gross Domestic Product- the total market value of all final goods and services produced annually in an economy

Nominal GDP

the total value of all goods and services produced in the economy during a given year, calculated with the prices current in the year in which the output is produced

= (Real GDP x GDP Deflator) / 100

Real GDP

the total value of all goods and services produced in the economy during a given year, calculated using the prices of a selected base year in order to remove the effects of price changes

= (Nominal GDP / GDP Deflator) x 100

GDP per capita

GDP divided by population

Circular Flow Diagram

a diagram that views the economy as consisting of households and firms interacting in a goods and services market and a labor market. Shows the flow of money within the economy

Expenditure Approach

Approach to calculating GDP by adding up aggregate spending on domestically produced goods and services in the economy

= C + I + G + Xn

Income Approach

approach to calculate GDP by adding up the total factor income earned by households from firms in the economy including rent, wages, interest, and profit

Value-Added Approach

calculating GDP is to survey firms and add up their contributions during each stage of prodction to the value of final goods and services

Non-market Transactions

economic activity not taking place in the legal market, and therefore, not included in GDP

Labor Force

the total number of workers, including both the employed and the unemployed

Unemployment Rate

the percentage of the labor force that is unemployed

= (# unemployed / # in labor force) x 100

Labor Force Participation Rate

the percentage of the working-age population (16 or older) in the labor force

= (labor force / population 16 over) x 100

Cyclical Unemployment

the deviation of actual rate of unemployment from the natural rate

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, or there are more people seeking jobs in a labor market than there are jobs available at the current wage rate

Limitations of Unemployment

The measured unemployment rate is often criticized for understating the level of joblessness because it excludes groups such as discouraged workers and part-time workers.

Consumer Price Index (CPI)

measures the cost of the market basket of a typical urban American family

= (cost of market basket given year / cost of market basket base year) x 100

Inflation

a rising overall price level

Deflation

a decrease in the general level of prices

Disinflation

the process of bringing the inflation rate down

Inflation Rate

the percentage increase in the price level from one year to the next

= (New CPI - Old CPI / Old CPI) x 100

Real Variables

variables measured in physical units (relative prices, real wages, real interest rate)

Market basket

a hypothetical set of consumer purchases of goods and services

Business Cycle

Business cycles are fluctuations in aggregate output and employment because of changes in aggregate supply and/or aggregate demand.

Recession

a period of temporary economic decline during which trade and industrial activity, employment are reduced

Expansion

A period of economic growth as measured by a rise in real GDP

Actual Output

the actual production of goods and services in an economy in a given time period.

Potential Output

what an economy can produce when operating at maximum sustainable employment

GDP deflator

measures the prices of all goods produced

Nominal GDP/Real GDP x 100