Economics: Market Failures, GDP, Unemployment, and Inflation Concepts

Optimal Mix of Output

The "most desirable" combinations of output attainable with existing resources, technology, and social values. This is a subjective goal based on what society wants at a given point in time.

Market Failure

An imperfection in the market mechanism that prevents an optimal outcome.

Command and Control

Rules and regulations established by governments controlling the use of goods, services, and resources. This is a separate mechanism from the market mechanism.

Government Failure

Government intervention that prevents an optimal outcome.

Public Good

A good or service whose purchase by one person does not exclude use by others. A good that is 'non-excludable' in consumption. Examples: lighthouses, national defense, asteroid deflection.

Externalities

Costs or benefits of an activity borne by a third party. For example, if a factory pollutes the air the population around that factory are harmed.

Market Power

The ability to alter the market price of a good or service. For example, a monopoly may be able to raise the market price for a highly sought after good or service.

Antitrust Law

Laws that intervene to alter a market structure or prevent abuse of market power. For example, breaking a large company into several smaller ones to increase competition.

Market Mechanism

The use of prices and sales to signal desired outputs. Having the market allocate natural and human (labor) resources.

Laissez Faire

The doctrine of 'leave it alone' or nonintervention by government in the market.

Mixed Economy

An economy that uses both the market mechanism and government directives to allocate goods and resources.

National Income Accounting

The measurement of aggregate economic activity, particularly national income and its components.

Gross Domestic Product (GDP)

The total market value of all 'finished' goods and services produced within a nation's borders in a given time period.

GDP Calculation Components

Consumption expenditures (C), Investment spending (I), Government expenditures other than transfer payments (G), and Net Exports (X-M).

GDP Formula

GDP = C + I + G + (X-M)

Double Counting in GDP

GDP deliberately avoids double counting by excluding the resale of goods produced in previous years and by not counting intermediate goods.

Government Transfer Payments

Payments like unemployment benefits or pensions aren't counted directly in GDP; their impact is captured when recipients spend that money on final goods and services.

GDP per capita

Total GDP divided by total population; average GDP per person. This does not indicate the distribution of that GDP or wealth in a country.

Intermediate Goods/Services

Goods or services purchased for use as inputs in the production of final goods or final services.

Finished Goods/Services

A good or service that will not be sold again as part of some other good.

Nominal GDP

The value of final output produced in a given period, measured in the prices of that period (current prices).

Real GDP

The value of final output produced in a given period, adjusted for changing prices.

Inflation

An increase in the average level of prices of goods and services.

Investment

Expenditures toward the production/maintenance of new factories, equipment, and structures in a given time period. You invest in things to make you more productive.

Exports

Goods and services sold to foreign buyers.

Imports

Goods and services purchased from international sources.

Net Exports

The value of exports minus the value of imports: (X − M).

Depreciation

The value of capital used up while producing goods and services is commonly called depreciation.

Absolute Advantage

The ability of an actor to produce more of a good or service than another.

Comparative Advantage

The ability of an actor to produce a good or service at a lower opportunity cost than another.

Labor Force

All persons over age 16 who are either working for pay or actively seeking paid employment.

Unemployment

The inability of labor force participants to find jobs.

Unemployment Rate

The proportion of the labor force that is unemployed. Unemployment Rate = Unemployed Persons / Labor Force.

Underemployed

People seeking full-time paid employment who work only part time or are employed at jobs below their capability.

Discouraged Worker

An individual who isn't actively seeking employment but would look for or accept a job if one were available.

Seasonal Unemployment

Unemployment due to seasonal changes in employment or labor supply.

Cyclical Unemployment

Unemployment attributable to a lack of job vacancies—that is, to an inadequate level of aggregate demand.

Structural Unemployment

Unemployment caused by a mismatch between the skills (or location) of job seekers and the requirements (or location) of available jobs.

Frictional Unemployment

Brief periods of unemployment experienced by people moving between jobs or into the labor market.

Full Employment

The lowest rate of unemployment compatible with price stability, variously estimated at between 4 percent and 6 percent unemployment.

Natural Rate of Unemployment

The long-term rate of unemployment determined by the fundamentals found in labor and product markets.

Deflation

A decrease in the average level of prices of goods and services.

Money illusion

The use of nominal dollars rather than real dollars to gauge changes in one's income or wealth.

Nominal Income

The amount of money income received in a given time period, measured in current dollars.

Real Income

Income in 'constant dollars'; nominal income adjusted for inflation.

Consumer Price Index (CPI)

A measure (index) of changes in the average price of consumer goods and services, also known as inflation.

Core Inflation Rate

Changes in the CPI, excluding food and energy prices.

Price Stability

The absence of significant changes in the average price level; currently defined as a rate of inflation of less than 3 percent.

Business cycle

Alternating periods of economic growth and contraction.

Recession

A decline in total output (real GDP) for two or more consecutive quarters.

Full-employment GDP

The value of total market output (real GDP) produced at full employment.

Aggregate demand (AD)

The total quantity of output (real GDP) demanded at alternative price levels in a given time period, ceteris paribus.

Aggregate supply (AS)

The total quantity of output (real GDP) producers are willing and able to supply at alternative price levels in a given time period, ceteris paribus.

Demand-pull inflation

An increase in the price level initiated by excessive aggregate demand.

Cost-push inflation

An increase in the price level initiated by a shortfall of aggregate supply.