Topics 2.1 and 2.2 – GDP and the Circular Flow Model

• Product Market: markets where goods and services are bought and sold

• Consumer Spending: household spending on goods and services

• Factor Market: markets where resources, especially capital and labor, are bought and sold

• Government Spending: total expenditures on goods and services by federal, state, and local governments

• Tax Revenue: the total amount of funds the government receives from taxes

• Disposable Income: equal to income – taxes, this is the total amount of household income available to spend on consumption.

• Government Transfers: payments that the government makes to individuals without expecting a good or service in return

• Private Savings: equal to disposable income – consumer spending, this is a household’s disposable income that is not spent on consumption

• Financial Markets: channel private savings into investment spending and government borrowing

• Government Borrowing: the amount of funds borrowed by the government in the financial markets

• Investment Spending: spending by firms on new productive physical capital, such as machinery and structures, and changes in inventories

• Inventories: stocks of goods and raw materials held to facilitate business operations

• Exports: goods and services sold to other countries

• Imports: goods and services purchased from other countries

• Gross Domestic Product (GDP): the total value of all final goods and services produced in the economy during a given year

• Intermediate Goods: goods and services bought from one firm by another firm to be used as inputs into the production of goods and services

• Final Goods: goods and services sold to the final, or end, user

Topic 2.3 – Unemployment

• Employed: people currently holding a job in the economy, either part-time or full-time

• Unemployed: people who are actively looking for work but aren’t currently employed

• Labor Force: equal to the sum of the employed and the unemployed

• Discouraged Workers: nonworking people who are capable of working but have given up looking for a job due to the state of the job market

• Natural Rate of Unemployment: the unemployment rate that arises from the effects of

• frictional plus structural unemployment

Topics 2.4 and 2.5 – Price Indices and Inflation

• Inflation: a rising overall price level

• Deflation: a falling overall price level

• Disinflation: the process of bringing the inflation rate down

• Real Wage: the wage rate divided by the price level to adjust for the effects of inflation or deflation

• Real Income: income divided by the price level to adjust for the effects of inflation or deflation

• Price Level: the measure of overall prices in the economy

• Consumer Price Index: measures the cost of the market basket of the typical urban American family

• Nominal Interest Rate: the interest rate actually paid for a loan

• Real Interest Rate: the nominal interest rate minus the rate of inflation

Topic 2.6 – Real vs. Nominal GDP

• GDP Deflator: measuring and adjusting the nominal GDP for changes in the price level over time

• GDP per capita: GDP divided by the total population; it is equivalent to the average GDP

per person

Topic 2.7 – The Business Cycle

• Economic Growth: an increase in the maximum amount of goods and services that an economy can produce

• Full-Employment Output: the level of real GDP the economy can produce when all resources are fully employed

• Potential Output: what an economy can produce when operating at maximum sustainable employment (that is, the natural rate of unemployment)

• Output Gap: the difference between actual output and potential output