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Basic Macroeconomic Terminology Gross Domestic Product (GDP): the market value of all final goods and services produced in a year within a country' borders. Expenditure approach: GDP = C + I + G + X where C is gross private domestic consumption, I is gross private domestic investment, G is gross public consumption and investment and X is net exports (exports - imports). Gross National Product (GNP): the market value of all final goods and services produced in a year by nationally owned resources regardless of location. GNP = GNP + receipts of factor income from the rest of the world payments of factor income to the rest of the world. Nominal GDP (NGDP): measures output (GDP) in terms of its current dollar value. Real GDP (RGDP): measure output (GDP) by eliminating the influence of price changes from the nominal GDP statistics. Price index: measures price level changes over time. GDP deflator price index: measure of prices across the economy that reflects all of the categories of goods and services included in GDP. Consumer price index (CPI): measure of the average price of goods and services purchased by the typical household. Producer price index (PPI): measure of average prices received by producers. Cost of Living Adjustment (COLA): increase in wages that is designed to match increases in prices of items purchased by the typical household. Inflation: a sustained rise in the average level of prices Demand-pull inflation: inflation caused by increasing demand for output Cost-push inflation: inflation caused by rising costs of production Disinflation: a positive inflation rate that decreases over time Deflation: a negative rate of inflation Business cycle: the rise and fall of real GDP over time. Recession: a period in which real GDP falls (must be at least two consecutive quarters) Depression: a severe, prolonged economic contraction Expansion: a period in which real GDP increases Unemployment rate: the percentage of the labor force that is not working Types of Unemployment: Frictional Unemployment: due to short-term movement of workers between jobs. Structural Unemployment: caused by changes in technology or the structure of the economy. Cyclical Unemployment: arises because of the business cycle. Natural Rate of Unemployment (NRU): the unemployment rate that exists in the absence of cyclical unemployment. Relates unemployment to real GDP. Non-Accelerating Inflation Rate of Unemployment (NAIRU): the unemployment rate that exists with price stability. Relates the unemployment rate to the inflation rate. Potential RGDP: The maximum long-run sustainable level of output. The output produced at the natural rate of unemployment. Aggregate Demand (AD): reflects the relationship between aggregate expenditures and the average price level. The factors that influence AD are C, I, G and X as referenced as the expenditure approach. Aggregate Supply (AS): reflects the amount of output produced at different price levels. Short run AS (SRAS): output production can be greater than, less than or equal to potential RGDP. The SRAS becomes steeper as the economy approaches capacity or potential RGDP. Long run AS (LRAS): output production equal to potential RGDP, or the long-run capacity of an economy. To increase LRAS, an economy must permanently increase production capacity through technology improvements, availability of resources and/or the improvement of the quality of resources. Equilibrium: the point where AD=AS. Long run equilibrium occurs when AD=SRAS=LRAS and the rate of unemployment equals the natural rate of unemployment. LRAS SRAS P AD RGDP Neutrality of Money: Changes in the money supply has no long run real effects on the economy (i.e. cannot expand potential real GDP)