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Macro Unit 2
| Question | Answer |
|---|---|
| Gross Domestic Product (GDP) | The total market value of all final goods and services produced within a country's borders in a given year |
| Final Good | A good purchased by the end user; counted in GDP. |
| Intermediate Good | A good used in the production of another good; not counted in GDP to avoid double counting. |
| Expenditure Approach | GDP = C + I + G + (X − M) |
| Consumption (C) | Household spending on goods and services. |
| Investment (I) | Business spending on capital goods, new homes, and inventory. |
| Government Spending (G) | Government purchases of goods and services (not transfer payments). |
| Net Exports (X − M) | Exports minus imports. |
| Why Are Imports Subtracted? | Because imports are included in C, I, or G but were not produced domestically |
| Income Approach | GDP calculated by adding wages, rent, interest, and profit. |
| Why Expenditure = Income | Every dollar spent on output becomes income for someone else |
| Nominal GDP | GDP measured using current year prices |
| Real GDP | GDP adjusted for inflation using base year prices |
| GDP Deflator | (Nominal GDP ÷ Real GDP) × 100 |
| Inflation | A sustained increase in the overall price level. |
| Inflation Rate Formula | (New Price Index − Old Price Index) ÷ Old Price Index × 100 |
| Real GDP Formula | Nominal GDP ÷ (GDP Deflator ÷ 100) |
| Base Year | The year used for comparison when calculating real GDP or price indices. |
| Consumer Price Index (CPI) | A measure of the average change in prices of a fixed basket of goods over time |
| Unemployment Rate | (Unemployed ÷ Labor Force) × 100 |
| Labor Force | Employed + Unemployed individuals actively seeking work. |
| Frictional Unemployment | Short-term unemployment while workers search for jobs |
| Structural Unemployment | Unemployment caused by a mismatch between worker skills and job requirements. |
| Cyclical Unemployment | Unemployment caused by a recession |
| Natural Rate of Unemployment | Frictional + Structural unemployment. |
| Business Cycle | Fluctuations in economic activity over time |
| Expansion | Period of rising real GDP and falling unemployment |
| Recession | Period of falling real GDP and rising unemployment. |
| Peak | Highest point of economic expansion |
| Trough | Lowest point of economic contraction. |
| Recessionary Gap | When actual GDP is below potential GDP. |
| Inflationary Gap | When actual GDP is above potential GDP. |
| Real Wage | Nominal wage adjusted for inflation. |
| If Inflation > Wage Increase | Real wages decrease |
| If Wage Increase > Inflation | Real wages increase |
| Unexpected Inflation (Borrowers vs Lenders) | Borrowers benefit; lenders lose because loans are repaid with less valuable dollars |
| GDP Weaknesses | Does not measure income inequality, underground economy, non-market activity, environmental damage, or quality of life |
| Real GDP Per Capita | Real GDP divided by population; measures standard of living |
| Used Goods | Not counted in GDP because they were produced in a previous year. |
| Transfer Payments | Not counted in GDP because no current production occurs |
| Foreign Production by U.S. Company | Not counted in U.S. GDP because GDP is based on location, not ownership |
| Purchasing Power | The amount of goods and services money can buy. |
| Cost-Push Inflation | Inflation caused by rising input costs. |
| Demand-Pull Inflation | Inflation caused by excessive aggregate demand. |
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