ECON201 Chapter 9 Macroeconomics: Sizing Up the Economy Using GDP

Vocabulary practice flashcards covering fundamental macroeconomic concepts, the circular flow model, GDP definitions, the three measurement perspectives, limitations of GDP, and the distinction between nominal and real GDP.

Macroeconomics

The branch of economics that focuses on aggregate economic totals across an entire country, such as total national income, total output produced by all businesses, and total spending across households, businesses, and government.

Microeconomics

The branch of economics that focuses on individual decision-makers, such as an individual's income, the output of a single business, or the spending decisions of a specific household or company.

Circular Flow Diagram

A model of the economy that illustrates how households and businesses are linked through the opposing flows of real resources (inputs and outputs) and money (spending and income).

Interdependence Principle

A core economic principle stating that your best choice depends on multiple other factors because economic decisions and actors are interconnected.

Gross Domestic Product (GDP)

The total market value of all final goods and services produced within the borders of a country in a given year.

GDP per Person (GDP per Capita)

A country's total Gross Domestic Product divided by its population, representing the average economic output or income per resident.

Intermediate Goods

Goods and services that are used as inputs in the production of other products; they are excluded from GDP to prevent double counting.

Final Goods and Services

Goods and services sold to the ultimate end user, whose market price embodies the cumulative value created at all earlier stages of production.

Total Spending Perspective

An approach to measuring GDP by summing all expenditure on final goods and services across four sectors: consumption, investment, government purchases, and net exports ($Y = C + I + G + NX$).

Consumption ($C$)

Spending by households on final goods and services, such as food, clothing, transportation, entertainment, and utilities.

Investment ($I$)

Spending on new capital assets that expand the productive capacity of the economy, including business equipment, office buildings, research and development, and newly constructed residential housing.

Government Purchases ($G$)

Spending by federal, state, and local governments on goods and services, such as public education, highways, and national defense, excluding transfer payments.

Transfer Payments

Government payments that redistribute income from one group to another without the exchange of goods or services (such as Social Security or unemployment insurance benefits); they are excluded from GDP.

Net Exports ($NX$)

The value of total domestic spending on exports minus the value of total spending on imports ($NX = \text{Exports} - \text{Imports}$).

Exports

Goods and services produced domestically within a country and purchased by foreign buyers.

Imports

Goods and services produced overseas in other nations and purchased by domestic buyers.

Total Output Perspective

An approach to measuring GDP by summing the value added by every firm at each stage of production across the economy, mapping the structure of production.

Value Added

The increase in the value of an item at each stage of production, calculated as total sales revenue minus the cost of intermediate inputs ($\text{Value added} = \text{Total sales} - \text{Cost of intermediate inputs}$).

Total Income Perspective

An approach to measuring economic activity (also known as Gross Domestic Income) by summing every dollar of income earned across the economy, consisting of total wages paid to workers plus total profits earned by business owners.

Shadow Economy

Economic activity intentionally conducted out of view of the government to evade regulations or taxes (including illegal trade, unlicensed businesses, and unreported cash transactions), which is excluded from official GDP.

Nominal GDP

A measure of Gross Domestic Product evaluated using current prices prevailing in the specific year the goods and services were produced.

Real GDP

A measure of Gross Domestic Product evaluated using constant prices from a base period, which removes the distortion of price changes to isolate true changes in physical output.