Chapter 11: Basic Economics Concepts, Economic Indicators, and the Business Cycle

11.1 The Circular Flow and GDP

  • Gross Domestic Product (GDP): total value of all final goods and services produced in a year in a country
    • Calculated using expenditure approach or income approach
    • GDP = aggregate income = aggregate expenditure
  • National income (NI): sum of income earned by factors of production of the country’s citizens
  • Personal income (PI): income received by a household before personal income taxes
  • Disposable income (DI): personal income - personal income taxes
  • Depreciation: decline in value of capital over time
    • Due to wear or obsolescence

11.2 Unemployment

  • Labor force: includes employed and unemployed adults
    • Unemployed must be able to willing to work, and made an effort to find work in past 4 weeks
  • Labor force participation rate: number of people in labor force divided by working-age population
  • Discouraged workers: people who are able and willing to work but stop trying to find work due to frustrations
  • Full employment: level of unemployment that corresponds with natural rate of unemployment
  • Okun’s Law: for every 1% increase in unemployment rate above natural rate, output falls 2-3%

11.3 Price Indices and Inflation

  • Inflation: sustained increase in overall price level
  • Deflation: sustained decrease in overall price level
  • Nominal salary: actual number of dollars a person earns
  • Real salary: purchasing power of dollars

11.4 Real vs Nominal GDP

  • Consumer Price Index (CPI): government’s gauge of inflation

  • Producer Price Index (PPI): measures changes in prices of wholesale goods

    • Ex) Lumber, steel
  • Gross Domestic Product Deflator: alternative general price index that reflects importance of products in current market baskets

11.5 Business Cycles

  • Business cycle: repeating fluctuation of financial and economic activity
    • Occurs nonperiodically during certain period of time
  • Say’s Law: supply creates its own demand

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