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Circular Flow Model
Illustrates how different sectors of the economy (individuals, businesses, government) interact; individuals supply resources and demand products, while businesses supply products and demand resources.
Private Sector
The part of the economy run by individuals and businesses.
Public Sector
The part of the economy controlled by the government.
Factor Payments
Payments for the factors of production, including rent, wages, interest, and profit.
Transfer Payments
When the government redistributes income, such as through welfare and social security.
Subsidies
Government payments to businesses.
Gross Domestic Product (GDP)
The dollar value of all final goods and services produced within a country in one year.
National Income Accounting
The collection of statistics on production, income, investment, and savings to measure economic growth.
Expenditures Approach
A method of calculating GDP by summing all spending on final goods and services produced in a given year.
Income Approach
A method of calculating GDP that adds up all income earned from selling all final goods and services.
Value-Added Approach
A method of calculating GDP that sums the dollar value added at each stage of the production process.
Consumer Spending (C)
Purchases of final goods and services by individuals.
Business Investment (I)
Businesses spending on tools and equipment, including capital like machines and new real estate.
Government Spending (G)
Government expenditures on goods and services, excluding transfer payments and interest on national debt.
Net Exports (X-M)
Exports minus imports.
GDP per capita
GDP divided by the population; it is a measure of a nation's standard of living.
Intermediate Goods
Goods used in the production of final goods that do not count toward GDP.
Unemployment
Workers who are actively looking for a job but aren't currently working.
Unemployment Rate
The percent of people in the labor force who want a job but are not working, calculated by (# unemployed / # in labor force) X 100.
Labor Force
Individuals who are at least 16 years old, able and willing to work, and not institutionalized.
Frictional Unemployment
Temporary unemployment or being between jobs.
Structural Unemployment
Unemployment resulting from changes in the labor force that make some skills obsolete.
Cyclical Unemployment
Unemployment that increases during a recession.
Natural Rate of Unemployment (NRU)
The amount of unemployment that exists when the economy is healthy, generally around 4-6%.
GDP Calculation Formula (Expenditures Approach)
GDP (Y) = C + I + G + (X-M); where C = consumer spending, I = business investment, G = government spending, X = exports, M = imports.
% Change in GDP
The formula to measure growth from year to year: ((Year 2 – Year 1) / Year 1) X 100.
Housing as Investment
New real estate counts as investment spending because it can potentially be rented out.
