Economics: Key Concepts in Inflation, Unemployment, and GDP

Consumer Price Index (CPI)

A measure of the average price level of a basket of goods and services typically purchased by consumers. It is commonly used to measure inflation.

Cyclical unemployment

Unemployment caused by a downturn in the business cycle, such as during a recession.

Deflation

A sustained decrease in the overall price level of goods and services in an economy.

Discouraged workers

People who are available for work but have not looked for a job during the previous four weeks because they believe no jobs are available for them.

Efficiency wage

A wage that is intentionally set above the market-clearing wage to increase worker productivity, reduce turnover, or attract better-qualified workers.

Employed

People who are working for pay or profit, including people who have jobs but are temporarily absent from work.

Employment-population ratio

The percentage of the working-age population that is employed.

Frictional unemployment

Short-term unemployment that arises from the process of matching workers with jobs, such as when people are searching for a new job.

Inflation rate

The percentage increase in the overall price level over a specific period of time.

Labor force

The sum of employed and unemployed workers in the economy.

Labor force participation rate

The percentage of the working-age population that is in the labor force.

Menu costs

The costs businesses face when they have to change the prices of their products, such as updating menus, catalogs, websites, or price tags.

Natural rate of unemployment

The normal level of unemployment that exists when the economy is operating at potential output; it consists primarily of frictional and structural unemployment.

Nominal interest rate

The stated interest rate on a loan or financial asset before adjusting for inflation.

Price level

The average level of prices for goods and services in an economy.

Producer Price Index (PPI)

A measure of the average change over time in the prices received by domestic producers for the goods and services they sell.

Real interest rate

The interest rate adjusted for inflation. It approximately equals the nominal interest rate minus the inflation rate.

Structural unemployment

Unemployment caused by a persistent mismatch between the skills or characteristics of workers and the requirements of available jobs.

Unemployed

People who are not currently working but are actively looking for work and are available to work.

Unemployment rate

The percentage of the labor force that is unemployed.

Business cycle

The recurring pattern of expansions and contractions in economic activity over time.

Consumption

Spending by households on goods and services, excluding purchases of new houses.

Economic growth

The ability of an economy to produce increasing amounts of goods and services over time.

Expansion

A period during the business cycle when economic activity, employment, income, and production are increasing.

Final good or service

A good or service sold to its final user and not purchased for further processing or resale.

GDP deflator

A measure of the overall price level for domestically produced final goods and services, calculated as nominal GDP divided by real GDP, multiplied by 100.

Government purchases

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

Gross domestic product (GDP)

The total market value of all final goods and services produced within a country's borders during a specific period of time.

Intermediate good or service

A good or service that is used as an input to produce another good or service rather than being sold to its final user.

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, economic growth, and business cycles.

Microeconomics

The study of how households and firms make decisions, how they interact in markets, and how government policies affect their choices.

Net exports

The value of exports minus the value of imports.

Nominal GDP

The value of final goods and services produced in an economy measured using current-year prices.

Price level

The average level of prices for goods and services in an economy.

Real GDP

The value of final goods and services produced in an economy measured using base-year prices, allowing changes in production to be separated from changes in prices.

Recession

A significant decline in economic activity that lasts for an extended period of time and is characterized by decreases in production, income, and employment.

Transfer payments

Payments made by the government to individuals for which the government does not receive a good or service in return, such as Social Security or unemployment benefits.

Underground economy (or shadow economy)

Economic activity that is hidden from the government, often to avoid taxes or regulations, and therefore is not fully recorded in official economic statistics.

Value added

The increase in the value of a good or service created by a firm during the production process; it equals the firm's revenue from selling the product minus the cost of intermediate goods used to produce it.