Principles of Macroeconomics: Business Cycles and GDP

Flashcards covering key vocabulary from lecture notes on macroeconomics, the business cycle, Gross Domestic Product (GDP), its components, measurement nuances, and common critiques.

Macroeconomics

A framework for measuring major economic variables and developing policy responses, with a short-run focus on business cycles (demand-side) and a long-run focus on growth (supply-side).

John Maynard Keynes

Began the field of macroeconomics in the 1930s in response to the Great Depression, emphasizing that one cannot fix what cannot be measured.

Demand-side

A short-run focus in macroeconomics that looks at incomes and consumption over a few years, related to business cycles.

Supply-side

A long-run focus in macroeconomics that looks at production and technology over a few decades or generations, related to economic growth.

Gross Domestic Product (GDP)

The market value of goods and services produced in a country during a given time period regardless of nationality.

GDP Formula

GDP = C + I + G + NX, where C is consumption, I is investment, G is government spending, and NX is net exports.

Consumption (C)

Spending by households on goods and services, making up the largest share of GDP.

Investment (I)

Spending by businesses on goods and services, considered the most volatile component of GDP.

Government (G)

Spending by governments on goods and services, financed by tax revenue and borrowing.

Net Exports (NX)

The difference between exports (X) and imports (M), calculated as NX = X – M.

Exports (X)

The value of what the rest of the world buys from a domestic country.

Imports (M)

The value of what the rest of the world sells to a domestic country.

Nominal GDP

The final market price of goods and services in current dollars.

Real GDP

Adjusts for price changes (constant dollars) to measure pure production, controlling for inflation.

Per Capita Real GDP

Real GDP adjusted for population, used to control for the size of an economy.

GDP Growth

The measure of changes in GDP over time, usually year-over-year, expressed as a percent change.

Potential GDP

What GDP would be if the economy were operating at full employment and capacity, determined by the quantity and quality of labor and capital, and a long-run concept.

National Income Accounting Identity

A measure of aggregate demand (purchasing power) where the total value of production equals total spending (GDP = C + I + G + NX).

Y = C + S

An equation stating that income (Y) is equal to consumption (C) plus saving (S).

Durable goods

Consumption goods that have a long lifespan, usually purchased on credit (e.g., houses, cars).

Non-durable goods

Consumption goods with a short lifespan (e.g., food, entertainment).

Services

Intangible consumption items with no physical goods exchanged, consumed as produced (e.g., health care, tax preparation).

Residential investment

Investment spending on houses, apartments, and structures for consumers.

Non-residential investment

Investment spending on equipment, software, and commercial real estate.

Inventory (Investment)

Goods purchased by businesses to be sold in the future.

Budget deficit

Occurs when government spending (G) is greater than tax revenue (T).

Budget surplus

Occurs when tax revenue (T) is greater than government spending (G).

Trade surplus

A condition where Net Exports (NX) are greater than 0, meaning exports exceed imports (X > M).

Trade deficit

A condition where Net Exports (NX) are less than 0, meaning imports exceed exports (X < M).

Exchange rate

How much foreign currency can be purchased with a unit of domestic currency.

Weak currency

Occurs when domestic currency can purchase relatively fewer units of foreign currency, leading to cheaper exports and more expensive imports.

Strong currency

Occurs when domestic currency can purchase relatively greater units of foreign currency, leading to more expensive exports and cheaper imports.

Recession

A movement from a peak (high) to a trough (low) in economic activity, characterized by a significant decline in activity spread across the economy for more than a few months, usually seen in negative real GDP growth.

Expansion

A movement from a trough (low) to a peak (high) in economic activity, usually characterized by positive real GDP growth.

V-shaped recovery

An economic recovery resembling a rapid and deep fall in activity followed by a rapid and large rebound.

U-shaped recovery

An economic recovery resembling a slow and shallow fall in activity followed by a slow and shallow rebound.

L-shaped recovery

An economic recovery resembling a rapid and deep fall in activity followed by a slow and shallow rebound, sometimes called a checkmark recovery.

W-shaped recovery

An economic recovery characterized by multiple contractions and expansions, indicating a bumpy road to final recovery.

K-shaped recovery

An economic recovery where a small group of households and businesses recover rapidly while others continue to fall, highlighting distributional inequalities.

Critiques of GDP

GDP measures material wealth but excludes non-market production, does not account for growth costs, ignores distribution, includes 'broken windows' problem, excludes non-monetary progress, and omits underground economic activity.