Download Unit 1 Basic Macroeconomic Terminology

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)