Review Notes for Exam 2: GDP, Unemployment, and Economic Growth

These flashcards cover key terms related to GDP, unemployment, economic growth, and their measures.

Business cycle

Alternating periods of economic expansion and economic recession.

Consumption

Spending by households on goods and services, not including spending on new houses.

Economic growth

The ability of an economy to produce increasing quantities of goods and services.

Expansion

The period of a business cycle during which total production and total employment are increasing.

Final good or service

A good or service purchased by a final user.

GDP deflator

A measure of the price level, calculated by dividing nominal GDP by real GDP and multiplying by 100.

Government purchases

Spending by federal, state, and local governments on goods and services.

Gross domestic product (GDP)

The market value of all final goods and services produced in a country during a period of time, typically one year.

Inflation rate

The percentage increase in the price level from one year to the next.

Intermediate good or service

A good or service that is an input into another good or service, such as a tire on a truck.

Investment

Spending by firms on new factories, office buildings, machinery, and additions to inventories, plus spending by households and firms on new houses.

Macroeconomics

The study of the economy as a whole, including topics such as inflation, unemployment, and economic growth.

Microeconomics

The study of how households and firms make choices, how they interact in markets, and how the government attempts to influence their choices.

Nominal GDP

The value of final goods and services evaluated at current-year prices.

Real GDP

The value of final goods and services evaluated at base-year prices.

Recession

The period of a business cycle during which total production and total employment are decreasing.

Transfer payments

Payments by the government to households for which the government does not receive a new good or service in return.

Underground economy

Buying and selling of goods and services that is concealed from the government to avoid taxes or regulations or because the goods and services are illegal.

Value added

The market value a firm adds to a product.

Cyclical unemployment

Unemployment caused by a business cycle recession.

Deflation

A decline in the price level.

Efficiency wage

An above-market wage that a firm pays to increase workers’ productivity.

Employed

Someone who currently has a job or who is temporarily away from his or her job.

Labor force

The sum of employed and unemployed workers in the economy.

Natural rate of unemployment

The normal rate of unemployment, consisting of frictional unemployment and structural unemployment.

Producer price index (PPI)

An average of the prices received by producers of goods and services at all stages of the production process.

Real interest rate

The nominal interest rate minus the inflation rate.

Structural unemployment

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

Unemployment rate

The percentage of the labor force that is unemployed.

Consumer price index (CPI)

A measure of the average of the prices a typical urban family of four pays for the goods and services they purchase.

Crowding out

A decline in private expenditure as a result of an increase in government purchases.

Financial intermediaries

Firms that borrow funds from savers and lend them to borrowers.

Labor productivity

The quantity of goods and services that can be produced by one worker or by one hour of work.

Potential GDP

The level of real GDP attained when all firms are producing at capacity.

Long-run economic growth

The process by which rising productivity increases the average standard of living.