national income

The sum of income earned by the factors of production owned by a country’s citizens.

personal income

Is the money income received by households before personal income taxes are subtracted.

disposable income

Personal income minus personal income taxes.

expenditure approach

Adds up spending by households, firms, the government, and the rest of the world using the following formula: GDP = personal consumption + investment in new physical capital + government purchases + (exports - imports)

income approach

Makes use of the fact that expenditures on GDP ultimately become income. Formula: GDP = NI + Depreciation - Subsidies + Net income of foreigners

depreciation

The decline in the value of capital over time due to wear or obsolescence.

subsidy payments

Given to businesses by governments as assistance.

net foreign income

Add the income of foreign workers and subtract the income of citizens working abroad.

net domestic product

GDP minus depreciation.

economics

The study of how to allocate scarce resources among competing ends.

macroeconomics

The branch of economics that deals with the whole economy and issues that affect most of society.

microeconomics

The branch of economics that looks at decision-making at the firm, household, and individual levels and studies behavior in markets for particular goods and services.

aggregate income

The total of all incomes in an economy without adjustments for inflation, taxation, or types of double counting.

aggregate expenditures

The total current value of all the finished goods and services in the economy.

unemployed

A state in which a labor force participant must be willing and able to work, and must have made an effort to seek work in the past four weeks.

labor force participation rate

The number of people in the labor force divided by the working-age population.

unemployment rate

The number of unemployed workers divided by the number in the labor force and then multiplied by 100 to get the percent.

frictional unemployment

Occurs as unemployed workers and firms search for the best available worker-job matches.

structural unemployment

The result of a skills mismatch.

cyclical unemployment

Results from downturns in the business cycle.

seasonal unemployment

The result of changes in hiring patterns due to the time of year.

discouraged worker

Those who are willing and able to work, but become so frustrated in their attempts to find work that they stop trying. Do not count as part of the unemployment rate.

dishonest worker

These individuals claim to be unemployed in order to receive unemployment benefits when, in fact, they do not want a job or are working for cash in an unreported job. Bias the unemployment rate upward.

natural rate of unemployment

The typical rate of unemployment in a normally functioning economy. The sum of frictional and structural unemployment. About 5% in the U.S.

full employment

Not 100 percent employment, but the level of employment that corresponds with the natural rate of unemployment. No cyclical unemployment.

Okun’s law

Economists, including the late Arthur Okun, have estimated that for every one percentage point increase in the unemployment rate above the natural rate, output falls by 2 to 3 percentage points.

deflation

The opposite of inflation- a sustained decrease in the general price level.

nominal salary

The actual number of dollars.

real salary

The purchasing power of the dollars.

money illusion

When someone notes an increase in their salary but not the general price of goods. Can lead to excessive spending.

menu cost

Costs to change price listings on signs, shelves, computers, and wherever else they are recorded to keep up with inflation.

Producer Price Index

Similar in calculations to the CPI, but it applies to the prices of wholesale goods such as lumber and steel. Sometimes a good predictor of future inflation because producers often pass their cost increases to consumers.

Gross Domestic Product Deflator

An alternative general price index that reflects the importance of products in current market baskets, rather than in base year market baskets, which become less relevant over time.

trade cycle

Another term for a Business Cycle.

business cycles

A recurrent fluctuation of financial and economic activity, which occurs non-periodically within a certain period of time.

classical economists

Theorize that wages, prices, and interest rates fluctuate quickly, clearing (bringing to equilibrium) labor and capital markets, and allowing input and output prices to stay in line with each other.

Say’s law

The idea that supply creates its own demand. When supplying goods, workers can earn money to spend or save, and savings end up being borrowed and spent on business investments. Classical economists believe this.

Keynesian analysis

If wages cannot adjust to match changes in price levels, deviations from full employment output might persist until the government steps in with monetary or fiscal policy to bolster or tame the economy. This is in contrast with the classical economists’ preference for laissez-faire (hands-off) governmental policy.