Macroeconomics Lecture Notes: GDP, Unemployment, Economic Growth, and Aggregate Expenditure

Vocabulary practice flashcards covering GDP definitions and approaches, unemployment types, long-run economic growth, aggregate expenditure, and foundational macroeconomic terms.

Gross Domestic Product (GDP)

The total market value of all final goods and services produced within a country in a given time period (usually a year), representing the total output and economic well-being of an economy.

Intermediate Goods

Goods that are used as components in the production of other goods (such as car seats in cars or cotton in shirts) and are excluded from GDP calculations.

Consumer Price Index (CPI)

An economic index that measures the monthly changes in prices that consumers pay for goods and services.

Price Level

A measure of the average prices of goods and services throughout an entire economy.

Disinflation

A situation where the rate of inflation is slowing down while still remaining positive.

Deflation

A decline in the general price of goods and services such that the inflation rate drops below $0\%$.

Employed

Anyone who has a job, including the self-employed, part-time workers, and those temporarily absent from work due to illness, disability, vacation, jury duty, labour disputes, or family crises.

Unemployed

People who are out of work, actively seeking employment, and have looked for work within the last 4 weeks, including those temporarily laid off.

Discouraged Workers

People who are not in the labour force because they have given up on finding a job or have not actively looked for work in more than 4 weeks.

Labour Force Participation (LFP) Rate

The percentage of working-age individuals in a population who are either employed or actively seeking employment.

Frictional Unemployment

Short-term unemployment that arises from the natural process of matching workers to jobs that suit their skills.

Structural Unemployment

Unemployment that arises from a persistent mismatch between the skills or attributes of workers and the requirements of available jobs.

Cyclical Unemployment

Job loss caused by a downturn or recession in the business cycle, which can drop to $0$ during an economic expansion.

Seasonal Unemployment

Unemployment caused by seasonal factors such as weather, calendar seasons, or holidays (e.g., agricultural, construction, or temporary holiday retail workers).

Natural Rate of Unemployment

The normal underlying level of unemployment in an economy, calculated as the sum of frictional and structural unemployment (also referred to as the full rate of unemployment).

Full Employment

The condition of the economy when cyclical unemployment is zero and only frictional and structural unemployment remain.

Long-Run Economic Growth (LREG)

The process by which rising labour productivity increases the average standard of living, measured by increases in real GDP per capita over decades or longer.

Labour Productivity

The quantity of economic goods and services that can be produced by one unit of labour (defined as one worker or one hour of work).

Recession

A period defined generally as 2 consecutive quarters ($6\text{ months}$) of negative real GDP growth.

Potential GDP

The level of real GDP attained when all firms are producing at sustainable normal capacity without causing unwanted inflation.

Output Gap

The percentage difference between actual real GDP and potential real GDP.

Financial System

The network of financial markets and intermediaries that channels funds from savers (households) to borrowers (firms) and returns dividends or interest back to savers.

Stocks

Financial securities that represent permanent partial ownership and profit claims (dividends) in a publicly traded firm and do not mature.

Coupon Bonds

Bonds that make periodic interest payments to the holder each year until maturity, at which time the face value is repaid.

Discount Bonds

Bonds sold at a lower price than their face value that pay no periodic interest, returning the full face value at maturity.

Private Saving

The portion of income that households retain after paying for consumption of goods and services and paying taxes.

Public Saving

The amount of tax revenue retained by the government after financing government purchases and making transfer payments to households.

Creative Destruction

A concept introduced by Joseph Schumpeter in the 1940s describing how new technologies drive economic progress by making older technologies and firms obsolete.

Human Capital

The accumulated knowledge and skill sets that workers acquire through formal schooling, training, and life experiences.

Just-In-Time System

A production system developed by Toyota that coordinates parts to arrive exactly when workers need them, cutting inventory storage costs and raising labour productivity.

Aggregate Expenditure (AE)

The total amount of spending in an economy over a specific period, consisting of consumption, planned investment, government purchases, and net exports.

Aggregate Expenditure Model

A macroeconomic model that examines the short-run relationship between aggregate expenditure and real GDP under the assumption of a constant price level.

Macroeconomic Equilibrium

The state where total planned aggregate expenditure equals total production (GDP), leaving firms with zero unplanned inventory changes.

Cash Flow

The difference between cash revenues and cash spending within a firm, excluding non-cash accounting items such as depreciation.

45°-Line Diagram (Keynesian Cross)

A visual model where the $45^\circ$ line displays all points where planned aggregate expenditure equals real GDP ($AE = GDP$).

Compensation of Employees

The income-approach GDP component (accounting for $51\%$ of GDP) that includes wages and salaries as well as employers' contributions to social programs.

Gross Operating Surplus

The income-approach GDP component ($26\%$ of GDP in 2024) representing payments made to owners of capital for its use in production.

Gross Mixed Income

Income generated by unincorporated small businesses that combines returns to both labour and capital ($13\%$ of GDP).

Autonomous Consumption

The level of consumption spending that occurs independently of income, persisting even if disposable income is zero.

Household Wealth

The total monetary value of all assets owned by a household minus the total value of its liabilities.

Gross Fixed Capital Formation

Expenditure by businesses, governments, and households on long-lived tangible assets (such as machinery and buildings) that cannot easily be converted into cash ($22\%$ of GDP).

Net Exports

The total value of a nation's exports minus the total value of its imports.

Nominal GDP

The market value of all final goods and services produced in an economy evaluated at current-year prices.

Real GDP

The value of final goods and services produced in an economy evaluated at base-year prices to remove the distortionary effects of inflation.

Capital Stock

The total cumulative quantity of physical capital available for production within a country.

Normal Goods

Goods or services for which demand increases when consumer income rises and decreases when consumer income falls.

Inferior Goods

Goods or services for which demand decreases when consumer income rises and increases when consumer income falls.

Substitutes

Goods and services that serve similar purposes, where a price increase in one causes the demand curve for the other to shift to the right.

Complements

Goods and services that are consumed together, where a price increase in one causes the demand curve for the other to shift to the left.

Opportunity Cost

The value of the next best alternative that is forfeited when making a choice under conditions of scarcity.

Absolute Advantage

The ability of an economic entity to produce a larger quantity of a good or service than competitors using the exact same amount of resources.

Comparative Advantage

The ability of an economic entity to produce a good or service at a lower opportunity cost relative to competitors.

Purchasing Power

The quantity of real goods and services that can be bought with a specific unit of currency.

Per-Worker Production Function (PWPF)

The macroeconomic relationship showing how real GDP per hour worked ($Y$) changes with increases in physical capital per hour worked ($X$), holding technology constant.

Paradox of Thrift

The macroeconomic phenomenon where an autonomous increase in saving without an increase in income reduces real GDP in the short run but supports higher real GDP in the long run.

Positive Response Rate

positive responses (%) / sum of positive and negative (%)

Marginal Propensity to Consume (MPC)

ΔC / ΔYD

Disposable Income (YD)

National Income - Net taxes

ΔC

MPC * ΔYD

National Income

YD + Net taxes (also = GDP)

National Income

Consumption + Savings + Taxes

ΔY

ΔC + ΔS + ΔT

Y

National Income (GDP)

(ΔY = ΔC + ΔS + ΔT) / ΔY

1 = MPC + MPS

ΔY / ΔI

Δ Real GDP / Δ Investment Savings

Total Change in GDP

$250B * (1 + MPC + MPC^2 + ... + MPC^n)

1 / (1 - MPC)

Multiplier

Multiplier

Δ Equilibrium Real GDP / Δ Autonomous Expenditure

Unemployment Rate

Number of Unemployed / Labour Force * 100

Participation Rate

Labour Force / Working-age Population * 100

Employment-population Ratio

Number of Employed / Working-age Population * 100

Working-age Population

Labour Force / Participation Rate * 100

CPI

Cost in Current Year / Cost in Base Year * 100

Inflation Rate

(New CPI - Initial CPI) / Initial CPI * 100

Annual Growth Rate

(New Value - Initial Value) / Initial Value * 100

Money From Then to Now

Value in Past * (CPI now / CPI then)

Number of Years to Double

70 / Growth Rate

How long it takes for Real GDP per capita to double

Number of years to double

GDP (Y)

C + I + G + NX

Closed Economy GDP (Y)

C + I + G

Private Savings

Y + GTr - C - T

Public Savings

T - G - GTr

Savings

Private + Public

Real GDP / Capita

Real GDP / Population

Average Annual % Change

Growth rates over more than a year period

Real GDP per Hour Worked

Y/L

Capital per Hour Worked

K/L