Economics: Key Concepts in Circular Flow, Markets, and GDP

Circular flow

An economic model that illustrates how money and goods flow through the economy between households and firms.

Household

An economic unit consisting of individuals living together who make joint economic decisions.

Firm

An organization that produces goods or services for sale in the market.

Product Market

The marketplace where final goods and services are bought and sold.

Factor / Resource Market

The marketplace where factors of production (labor, capital, land) are bought and sold.

Consumer spending

The total amount of money spent by households on goods and services.

Stocks

Financial instruments that represent ownership in a company and a claim on part of the company's assets and earnings.

Bonds

Debt securities issued by entities to raise capital, where the issuer promises to pay back the principal along with interest.

Disposable income

The amount of money that households have available for spending and saving after income taxes have been deducted.

Private savings

The portion of disposable income that households save rather than spend on consumption.

Financial markets

Markets where financial instruments, such as stocks and bonds, are traded.

Exports

Goods and services produced domestically and sold to foreign markets.

Imports

Goods and services produced in foreign countries and purchased by domestic consumers.

Net exports

The value of a country's total exports minus its total imports.

Investment spending

Expenditures on capital goods that will be used for future production.

Final goods & services

Products that are purchased by the end user and are not used to produce other goods.

Intermediate goods & services

Products that are used as inputs in the production of final goods and services.

Gross Domestic Product (GDP)

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

Real GDP

GDP adjusted for inflation, reflecting the true value of goods and services produced.

Nominal GDP

GDP measured at current market prices, without adjusting for inflation.

GDP per capita

A measure of a country's economic output that accounts for its number of people, calculated as GDP divided by the population.

Labor force

The total number of people who are able and willing to work, including both the employed and the unemployed.

Unemployment rate

The percentage of the labor force that is unemployed and actively seeking employment.

Underemployed

Individuals who are working in jobs that do not utilize their skills or are part-time workers who desire full-time work.

Discouraged workers

Individuals who are not actively seeking employment because they believe there are no jobs available for them.

Frictional unemployment

Temporary unemployment that occurs when people are between jobs or entering the workforce.

Structural unemployment

Long-term unemployment arising from shifts in the economy that create a mismatch between skills and job requirements.

Cyclical unemployment

Unemployment that results from economic downturns or recessions.

Seasonal unemployment

Unemployment that occurs at certain times of the year when demand for labor is lower.

Natural rate of unemployment (NAIRU)

The level of unemployment that exists when the economy is at full employment, including frictional and structural unemployment.

Inflation rate

The percentage increase in the price level of goods and services over a specific period.

Nominal interest rate

The interest rate before taking inflation into account.

Real interest rate

The interest rate that has been adjusted for inflation, reflecting the true cost of borrowing.

Disinflation

A decrease in the rate of inflation, indicating that prices are still rising but at a slower pace.

Market basket

A collection of goods and services used to measure changes in price levels over time.

Price index

A measure that examines the weighted average of prices of a basket of consumer goods and services.

Consumer Price Index (CPI)

An index that measures the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.

GDP deflator

A measure of the level of prices of all new, domestically produced, final goods and services in an economy.

Long-run growth

Sustained upward movement in the economy's output over time, typically driven by increases in productivity.

Cost-push inflation

Inflation that occurs when the costs of production increase, leading to a decrease in the supply of goods.

Demand-pull inflation

Inflation that occurs when demand for goods and services exceeds their supply.

Phillips curve

A graphical representation showing the inverse relationship between the rate of unemployment and the rate of inflation in an economy.