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