Gross Domestic Product (GDP): The total dollar value of all final goods and services produced within a nation’s borders in a given period of time.

• Consumer Spending + Gross Private Investment + Government Spending + (Exports - Imports)

Aggregate: A whole that is combined of many separate parts (“Everything put together”)

Real: Measured in unchanging, fixed prices (i.e., “adjusted for inflation”)

• ex., Real Gross Domestic Product, Real wages

Nominal: Measured in current prices. (i.e., “not adjusted for inflation”)

• ex. Nominal Gross Domestic Product, Nominal wages

Real GDP Per Capita: A measurement of the level of production in a country divided by the number of individuals in the country’s population.

• rGDP/Population

• Indicator of a nation’s standard of living and level of individual productivity

Inflation: • A steady increase in prices of goods and services over time.

• Money becomes less valuable and the opportunity cost of holding cash increases.

  • Inflation Rate = ((Price 2 – Price 1) ÷ Price 1) x 100

Cost Push Inflation: Higher input costs cause businesses to increase prices of goods and services

Demand Pull Inflation: Higher demand for products causes businesses to increase prices (law of supply).

Disinflation: A slowing in the rate of inflation. (i.e., “Prices are still rising, just not as rapidly as before”)

• ex. last year, the rate of inflation was 5%, this year the rate of inflation is 3%

Deflation: A negative inflation rate. (i.e., “Prices are lower (in real terms) than they were before

• ex. this year, the rate of inflation is -2%

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

• Price index that measures price inflation of deflation, and is calculated using nominal GDP and real GDP.

Consumer Price Index (CPI): A measure of the level of prices of a fixed market basket of goods and services commonly purchased by households.

• Price index that measures price inflation or deflation, and is calculated using nominal market baskets and a base year market basket.

Spending Multiplier: Represents the multiple by which GDP increases or decreases in response to an increase and decrease in government expenditures and/or investment

• Spending Multiplier = 1/(1-MPC)

The Business Cycle: A graphic representation of changes in real GDP over time.

• Indicates how productivity changes over time.

Expansion/Recovery: A sustained increase in real GDP over time (positive GDP growth).

• Increasing economic output

• Decreasing unemployment

• Increasing inflation

Peak: The highest level of rGDP in the business cycle

• Positive rGDP growth stops

• Unemployment rate stops rising

• Inflation rate stops rising

• End of economic prosperity

Trough: The lowest level of rGDP in the business cycle

• Negative rGDP growth stops

• Unemployment rate stops rising

• Inflation rate stops falling

• Beginning of economic recovery

Contraction: Negative rGDP growth.

Recession: A contraction that lasts between 6 months (2 consecutive quarters) to 2 years (8 consecutive quarters).

Depression: A contraction that lasts longer than 2 years (8 consecutive quarters)

Unemployment: Members of the labor force who are not working but are actively seeking work (within the past 4 weeks).

• Unemployment Rate = (unemployed/labor force) x 100

Labor Force: Adult civilians who are either employed or unemployed.

• Must be:

  • Over 16

  • Not incarcerated

  • Not institutionalized

Underemployed Workers: People who are:

• Overqualified for their jobs

• Working part time when they wish to work full time

• Working in a job that pays less than they are accustomed to earning

• Ex. An accountant who has to work part time at Whataburger because she can’t find a full time accounting job.

Discouraged Workers: People who were unemployed so long that they decided to stop seeking work

• When they stop seeking work, they drop out of the labor force

• They are no longer considered unemployed statistically