Comprehensive Macroeconomics: GDP, Unemployment, and Business Cycles

Macroeconomics

The overall economy, including GDP, inflation, unemployment, and long-run growth.

Real GDP

GDP adjusted for inflation, showing the value of goods/services in constant prices.

Nominal GDP

GDP measured in current prices without adjusting for inflation.

Nominal Income and Inflation Rate

If inflation rises and nominal income does not, real income falls.

GDP

The total market value of all final goods and services produced within a country in a year.

Components of GDP

Consumption, Investment, Government spending, Net exports (C + I + G + Xn).

What goes into GDP

Includes final goods/services; excludes intermediate goods, used goods, illegal sales, and purely financial transactions.

Avoiding Multiple Counting in GDP

Only count final goods or use the value-added method.

Final Goods and Services

Goods/services purchased for final use, not resale or further processing.

Value Added

The value a firm adds to a product at each stage of production.

Impact of Counting Intermediate Goods

It would artificially inflate GDP (double counting).

Expenditures Approach to GDP

GDP = C + I + G + Xn (exports - imports).

Difference Between Nominal and Real GDP

Nominal uses current prices; Real uses base-year prices.

Price Index

A measure showing how average prices change over time (e.g., CPI, GDP deflator).

Formula for Real GDP

Real GDP = (Nominal GDP ÷ Price Index) × 100.

Impact of Underground Market on GDP

GDP is understated because underground activity is not counted.

Lowest Point in a Business Cycle

The trough.

Recession

Two consecutive quarters of declining real GDP.

Business Cycle Diagram

Expansions, peaks, recessions, and troughs in economic activity.

Types of Unemployment

Frictional (job search), Structural (skills mismatch), Cyclical (recessions).

Labor Force

People employed + actively seeking work.

Not in the Workforce

Students, retirees, discouraged workers, stay-at-home parents.

Unemployment Rate Formula

Unemployed ÷ Labor Force × 100.

Natural Rate of Unemployment (NRU)

The rate at full employment (frictional + structural only).

Impact of Discouraged Workers

They drop out of labor force, making the unemployment rate appear lower.

Unemployment Types at Natural Rate

Frictional and structural only (cyclical = 0).

NRU and Potential Output Connection

At NRU, economy produces at potential (full employment) output.

Positive vs. Negative GDP Gap

Positive gap = actual > potential (inflationary). Negative gap = actual < potential (recessionary).

Unemployment Impact if Actual GDP < Potential GDP

Unemployment rises above the natural rate.

Full Employment Output

Also called Potential GDP.

Simple Circular Flow Model

Interaction between households, businesses, government, and international markets.

Basic Markets in Circular Flow

Product market (goods/services) and Resource market (factors of production).

Impact of Inflation in Resource Market

It raises production costs and reduces output.

Nominal Interest Rate Formula

Nominal = Real interest rate + Expected inflation.

Nominal Income, Real Income, and Price Level Connection

Real income = Nominal income ÷ Price level.

Inflation Rate Formula

((CPI new - CPI old) ÷ CPI old) × 100.

Strongest Impacts on Business Cycle

Changes in investment, consumer spending, government policy, external shocks.

Unemployment Counting Toward Full Employment

Frictional and structural.

Cyclical Unemployment Result

From downturns in the business cycle (recessions).