The market value of all final goods and services produced in a nation during a period of time, usually a year.
Gross domestic product (GDP)
What does GDP count?
GDP Counts only new domestic production.
GDP includes only current transactions.
What is not counted by GDP?
GDP includes only current transactions. It does not include secondhand transactions such as the sale of a used car or home. It also does not include nonproductive financial transactions, such as purely private or public financial transactions, such as giving private gifts, buying and selling stocks and bonds and making transfer payments.
A government payment to individuals not in exchange for goods or services currently produced.
The Circular Flow Model
A rate of change in a quantity during a given time period, such as dollars per year. For example, income and consumption are flows that occur per week, per month, or per year.
A quantity measured at one point in time. For example, an inventory of goods or the amount of money in a checking account.
The national income accounting method that measures GDP by adding all the spending for final goods during a period of time.
Formula for GDP using the Expenditure approach
GDP = C + I +G + (X - M)
I = Investment
G =Government Spending
X = Exports
M = Imports
The national income accounting method that measures GDP by adding all incomes, including compensation of employees, rents, net interest, and profits.
Formula for GDP using the Income Approach
GDP=C + R + P + N + I + D
C = Compensation of employees
R = Rent
P = Profits
N = Net Interest
I = Indirect taxes
D = Depreciation
Nonmarket Transactions - unpaid activitites such as homemaker production, child rearing and do-it-yourself home repairs.
Distribution, kind and quality of products
Neglect of leisure time
The underground economy
The total income earned by resource owners, including wages, rents, interest, and profits.
national income (NI)
NI is calculated as gross domestic product minus depreciation of the capital worn out in producing output.
NI = GDP - Depreciation
The total income received by households that is available for consumption, saving, and payment of personal taxes.
Personal Income (PI)
The amount of income that households actually have to spend or save after payment of personal taxes.
Disposable personal income (DI)
The value of all final goods based on the prices existing during the time period of production.
The value of all final goods produced during a given time period based on the prices existing in a selected base year.
A measure that compares changes in the prices of all final goods during a given year to the prices of those goods in a base year.
GDP chain price index
Real GDP = Nominal GDP ÷ GDP chain price index × 100
Alternating periods of economic growth and contraction, which can be measured by changes in real GDP.
The phase of the business cycle in which real GDP reaches its maximum after rising during a recovery.
A downturn in the business cycle during which real GDP declines, and the unemployment rate rises. Also called a contraction.
The phase of the business cycle in which real GDP reaches its minimum after falling during a recession.
An upturn in the business cycle during which real GDP rises.
An expansion in national output measured by the annual percentage increase in a nation's real GDP.
Variables that change before real GDP changes.
*New consumer goods orders
*New orders for plant and equipment
*New building permits
Variables that change at the same time real GDP changes.
*Personal income minus transfer payments
*Manufacturing and trade sales
Variables that change after real GDP changes.
*Duration of unemployment
*Labor cost per unit of output
*Consumer price index for services
*Commercial and industrial loans
The percentage of people in the civilian labor force who are without jobs and are actively seeking jobs.
The number of people 16 years of age and older who are employed or who are actively seeking a job, excluding armed forces, homemakers, discouraged workers, and other persons not in the labor force.
Civilian labor force
Formula to calculate the unemployment rate
Unemployment rate = unemployed ÷ civilian labor force × 100
Three types of Unemployment
Temporary unemployment caused by the time required of workers to move from one job to another.
Unemployment caused by a mismatch of skills of workers out of work and the skills required for existing job opportunities.
Unemployment caused by the lack of jobs during a recession.
The situation in which an economy operates at an unemployment rate equal to the sum of the frictional and structural unemployment rates.
Full employment - Also called the national rate of unemployment.
The difference between actual real GDP and potential or full-employment real GDP.
An increase in the general (average) price level of goods and services in the economy.
A decrease in the general (average) price level of goods and services in the economy.
A reduction in the rate of inflation.
A year chosen as a reference point for comparison with some earlier or later year.
An index that measures changes in the average prices of consumer goods and services.
Consumer price index (CPI)
Formula to calculate Consumer price index
CPI = cost of market basket of products at current-year prices ÷ cost of same market basket of products at base-year (1982) prices × 100
Formula to calculate Annual rate of inflation
Annual rate of inflation = CPI in given year − CPI in previous year ÷ CPI in previous year × 100
The actual number of dollars received over a period of time.
the actual number of dollars received adjusted for changes in the CPI
How to convert nominal income to real income
Real income = nominal income ÷ CPI (as decimal, or CPI/100)
A rise in the general price level resulting from an excess of total spending
An increase in the general price level resulting from an increase in the cost of production.
An extremely rapid rise in the general price level.