ECON 1000 - Unit 6

Macroeconomics

The branch of economics that studies the functioning and performance of an economy as a whole.

Gross Domestic Product (GDP)

The total market value of all final goods and services produced within a society over a period of time.

Intermediate Good

A good used in the production process that is not a final good or service and is excluded from GDP.

Final Good or Service

A good or service at its final stage of production, counted in GDP to avoid double counting.

Total Market Value

Different goods and services are weighted according to their market prices.

Produced

GDP includes goods and services produced during the period, not all items sold during the period.

Within a Society

GDP includes economic activity occurring within the geographic boundaries of the society.

Over a Period of Time

GDP measures production during a particular period, usually one year.

Consumption (C)

Purchases of newly produced goods and services by households.

Private Investment Expenditures (I)

Purchases of newly produced goods and services by firms.

Government Purchases (G)

Purchases of newly produced goods and services by local, state, or federal governments.

Net Exports (NX)

Exports minus imports.

Export

A good or service produced in the home country and sold to someone in a foreign country.

Import

A good or service produced in a foreign country and purchased by someone in the home country.

Trade Deficit

An excess of imports over exports, making net exports negative.

Trade Surplus

An excess of exports over imports, making net exports positive.

GDP Equation

Y = C + I + G + NX

Left Side of GDP Equation

Represents production or total output.

Right Side of GDP Equation

Represents how output is used or consumed.

Expanded Circular Flow

The basic circular flow expanded to show the roles of government and international trade.

Government in the Circular Flow

Households and firms pay taxes; government hires factors and provides finished goods and services.

International Trade in the Circular Flow

Some goods consumed domestically are imported, while some goods produced domestically are exported.

GDP as a Measure of Well-Being

GDP can serve as a proxy for well-being because higher GDP indicates greater ability to consume goods and services.

Nominal GDP

The value of GDP computed using current prices.

Real GDP

The value of GDP computed using prices from an arbitrary base year.

Nominal GDP and Price Changes

Nominal GDP can increase because more goods are produced or because prices increase.

Purpose of Real GDP

Real GDP controls for price changes by valuing goods and services at common prices.

Real GDP Hypothetical Question

What would the value of goods and services produced in a year be if valued at prices from another base year?

Base Year

An arbitrary year whose prices are used to calculate Real GDP.

Real GDP Per Capita

The value of Real GDP divided by total population.

Real GDP Per Capita and Well-Being

A useful proxy for economic well-being because it reveals average real consumption per person.

Industrially Advanced Countries (IACs)

High-income countries with primarily market-based economies, advanced industrial capital, and highly educated and skilled workforces.

Less Developed Countries (LDCs)

Lower-income countries held back by poor economic institutions, undeveloped industrial capital, and/or an uneducated or unskilled workforce.

Purchasing Power Parity (PPP)

An adjustment that accounts for differences in costs of living when comparing GDP across countries.

Per Capita GDP (PPP)

GDP per person adjusted for differences in costs of living between countries.

Inflation

An increase in the overall price level.

Inflation Rate

The rate at which the overall price level increases on an annual basis.

Deflation

A general decrease in the overall price level, resulting in a negative inflation rate.

Hyperinflation

An extremely high rate of inflation, generally above 100% per year.

Unemployment

Measures how many people in the labor force do not currently have jobs.

Unemployment Rate

The percentage of the labor force that is currently unemployed.

Labor Force

People who currently have a job or do not have a job but are actively seeking one.

Not in the Labor Force

People who neither have a job nor are actively seeking a job.

Great Inflation

A period of abnormally high inflation rates in the United States from the early 1970s through the early 1980s.

High Unemployment Periods

Periods after WWII in which U.S. unemployment rates were unusually high.

High Inflation Periods

Periods after WWII in which U.S. inflation rates were unusually high.

Misery Index

An economic indicator created by Arthur Okun that adds the annual inflation rate and unemployment rate.

Misery Index Formula

Misery Index = Inflation Rate + Unemployment Rate.

The Great Misery

The period from November 1973 through June 1983 when the Misery Index was at least 12.50 every mo