Comprehensive Guide to National Income, Unemployment, Inflation, Business Cycles, and International Trade

GDP (Gross Domestic Product)

Total market value of all final goods and services produced within a country in a given period.

Nominal GDP

Measured in current prices.

Real GDP

Adjusted for inflation (uses base-year prices).

GNP (Gross National Product)

Value of goods/services produced by nationals, regardless of location.

Net National Product (NNP)

GNP − Depreciation.

National Income (NI)

Total income earned by factors of production.

Personal Income (PI)

Income received by households before taxes.

Disposable Personal Income (DPI)

PI − Taxes.

GDP Components

Expenditure Approach: GDP=C+I+G+(X−M).

C

Consumption (households).

I

Investment (business spending on capital, inventories, housing).

G

Government spending (on goods/services, not transfers).

X − M

Net exports.

Income Approach

Sum of all incomes: wages + rents + interest + profits + taxes − subsidies + depreciation.

What GDP Excludes

Intermediate goods, Used goods, Illegal transactions, Household (non-market) production.

Real GDP per capita

Average living standard.

GDP Deflator

Deflator = (Nominal GDP / Real GDP) × 100.

CPI (Consumer Price Index)

Measures cost of a fixed basket of goods/services for typical consumers.

Labor Force

Labor Force = Employed + Unemployed.

Unemployment Rate

(Unemployed ÷ Labor Force) × 100.

Labor Force Participation Rate

(Labor Force ÷ Population 16+) × 100.

Types of Unemployment

Frictional, Structural, Cyclical, Seasonal.

Natural Rate of Unemployment (NRU)

Frictional + structural only.

Full Employment Output

Level of real GDP when economy at NRU.

Costs of Unemployment

Lost output (GDP gap), Social costs (poverty, stress), Government costs (benefits, lower tax revenue).

Okun's Law

Every 1 % rise in unemployment ≈ 2 % fall in real GDP below potential.

Inflation

sustained increase in average price level

Deflation

sustained decrease in average price level

Disinflation

slower inflation rate

Consumer Price Index (CPI)

a measure used to calculate inflation rate

Inflation Rate

CPI new − CPI old / CPI old × 100

Demand-pull inflation

too much spending chasing too few goods

Cost-push inflation

rising production costs (e.g., wages, oil prices)

Built-in inflation

wage-price spiral from inflation expectations

Nominal income

measured in current dollars

Real income

adjusted for inflation

Real income change %

Nominal % - Inflation %

Winners of inflation

borrowers, asset holders (if inflation unanticipated)

Losers of inflation

lenders, fixed-income earners, savers

Indexing

Contracts, wages, or benefits tied to inflation (COLA = cost-of-living adjustment)

Business Cycle

Regular fluctuations in real GDP and other economic indicators over time.

Expansion (Recovery)

rising GDP, income, employment

Peak

economy at/near full capacity, possible inflation pressure

Recession

GDP falls, unemployment rises (2 consecutive quarters = recession)

Trough

lowest point, start of recovery

Leading indicators

change before economy (e.g., stock prices, new orders)

Coincident indicators

change with economy (e.g., income, production)

Lagging indicators

change after economy (e.g., unemployment duration)

Fiscal policy

government spending/tax changes

Monetary policy

central bank changes in money supply/interest rates

Exports

goods/services sold abroad

Imports

goods/services bought from abroad

Net Exports (NX)

X − M

Comparative Advantage

A country should produce goods where it has the lowest opportunity cost.

Absolute Advantage

can produce more with same resources

Trade Restrictions

Tariffs, quotas, subsidies, trade embargoes

Balance of Trade

Surplus: exports > imports; Deficit: imports > exports

WTO

enforces trade rules

IMF / World Bank

promote financial stability, development