macro unit 2

Business Cycle

The cycle of economic expansion and contraction typically illustrated as a wavy curve (expansion → peak → contraction → trough).

Expansion Phase

A phase in the business cycle where GDP rises, unemployment decreases, and inflation increases.

Peak

The point in the business cycle at which GDP is highest, unemployment is lowest, and inflation is high.

Contraction Phase

A phase in the business cycle characterized by a decrease in GDP, an increase in unemployment, and a slowdown of inflation.

Trough

The lowest point in the business cycle, where GDP is at its lowest, unemployment is at its highest, and inflation is low.

GDP (Gross Domestic Product)

Total value of all final goods and services produced in a country within a given period.

Expenditure Approach to GDP

Calculation of GDP using the formula: GDP = C + I + G + Xn (Consumption, Investment, Government Spending, Net Exports).

Income Approach to GDP

Calculation of GDP as the sum of all incomes, including wages, rent, interest, and profit.

Nominal GDP

GDP measured in current prices, without adjusting for inflation.

Real GDP

GDP adjusted for inflation, calculated as Real = Nominal / (GDP Deflator × 100).

Types of Unemployment

Categories including structural, cyclical, frictional, and seasonal unemployment.

Structural Unemployment

Unemployment arising when skills become outdated (e.g., a factory worker replaced by AI).

Cyclical Unemployment

Unemployment stemming from economic downturns (e.g., layoffs during a recession).

Frictional Unemployment

Temporary unemployment during the transition between jobs (e.g., college graduates job hunting).

Seasonal Unemployment

Unemployment based on the time of year (e.g., ski instructors in winter).

Natural Rate of Unemployment (NRU)

The sum of structural and frictional unemployment, typically around 4-5%, indicating full employment without cyclical unemployment.

Inflation

General rise in price levels, which reduces purchasing power.

Demand-Pull Inflation

Inflation caused by excess demand leading to rising prices.

Cost-Push Inflation

Inflation driven by higher production costs that push prices up.

CPI (Consumer Price Index)

A measure of the average change over time in the prices paid by consumers for a market basket of goods and services.

Phillips Curve

Illustrates the inverse relationship between inflation and unemployment in the short-run.

Marginal Propensity to Consume (MPC)

The percentage of additional income that is spent on consumption.

Marginal Propensity to Save (MPS)

The percentage of additional income that is saved, where MPC + MPS = 1.

Production Possibilities Frontier (PPF)

A graph showing the maximum feasible combinations of output for two products, demonstrating concepts like efficiency and opportunity cost.

Comparative Advantage

The ability of an entity to produce a good or service at a lower opportunity cost than another entity.

Absolute Advantage

The ability of an entity to produce more of a good or service than another entity.