Gross Domestic Product

The Gross domestic Product (GDP) is the market value of all final goods and services produced within a
country in a given period of time. The GDP is the officially recognized totals. The following equation is
used to calculate the GDP:

GDP=C+I+G+(X−M)GDP=C+I+G+(X−M)

Written out, the equation for calculating GDP is:

GDP = private consumption + gross investment + government investment + government spending +

(exports – imports).

Gross national product is the value of all goods and services made by a

country's residents and businesses, regardless of production location. GNP
doesn't count any income earned in the United States by foreign residents or
businesses.
It also excludes products manufactured in the United States by overseas firms.
 GNP = Consumption + Investment + Government + X (net exports, or imports
minus exports) + Z (net income earned by domestic residents from overseas
investments - net income earned by foreign residents from domestic
investments.) 
Circular Flow of Income
economic model that pictures income as flowing continuously between businesses and
consumers
Gross Domestic Product
the dollar amount of all final goods and services produced within a country's borders in
a year.
Gross National Product
The total value of goods and services, including income received from abroad,
produced by the residents of a country within a specific time period, usually one year.
Net National Product
a measure of all goods and services produced by a country in a year, including
production from its investments abroad, MINUS the loss or degradation of natural
resource capital as a result of productivity
Nominal GDP
the GDP measured in terms of the price level at the time of measurement (unadjusted
for inflation)
Real GDP
the production of goods and services valued at constant prices
Per Capita GDP
total GDP divided by the number of people in a country
Human Development Index
Indicator of level of development for each country, constructed by United Nations,
combining income, literacy, education, and life expectancy
Aggregate Demand
sum of all personal consumption expenditures, business expenditures, and government
expenditures in a particular time period; total quantity of goods and services all citizens,
businesses, government will want at any one time
Consumption
(economics) the utilization of economic goods to satisfy needs or in manufacturing
Investment
money that is invested with an expectation of profit
Inflationary Gap
The amount by which aggregate spending at full employment exceeds full-employment
output.
Deflationary Gap
present when total spending (aggregate demand) is less than the full employment level
of output, thus causing unemployment
Business Cycle (Trade Cycle)
shows fluctuations in the economic level of output in an economy over time measured
by changes in real GDP and suggests that the changes are cyclical. Stages in the
business cycle include the trough, recovery, boom, peak and recession
Demand-Side Policies
policies that are aimed at increasing the aggregate demand to increase the equilibrium
level of output within an economy
Fiscal Policy
The federal government efforts to keep the economy stable by increasing or decreasing
taxes or government spending
Monetary Policy
Government policy that attempts to manage the economy by controlling the money
supply and thus interest rates.
Aggregate Supply
the total supply of all the goods and services available in an economy
Short-Run Aggregate Supply
The relationship between the quantity of real GDP supplied and the price level when the
money wage rate, the prices of other resources, and potential GDP remain constant.
Long-Run Aggregate Supply
inputs prices (ex: wages) adjust with output prices and vice versa, this eliminates the
incentive to produce more or less output at higher or lower price levels since purchasing
power of per-unit profits has not changed
Supply-Side Policies
Government policies designed to shift the long run aggregate supply curve to the right,
thus increasing potential output in the economy
Unemployment
The percentage of those in the labor force over the age of 16 actively seeking work, but
who are unable to find jobs.
Full Employment
The lowest possible level of unemployment in an economy.
Underemployment
the condition when people work at jobs for which they are overqualified or that do not
utilize their skills
Unemployment Rate
the percentage of the work force that is unemployed at any given date
Structural Unemployment
..., Unemployment of workers whose skills are not demanded by employers, who lack
sufficient skill to obtain employment, or who cannot easily move to locations where jobs
are available
Frictional Unemployment
..., unemployment that results because it takes time for workers to search for the jobs
that best suit their tastes and skills
Seasonal Unemployment
..., unemployment that occurs as a result of harvest schedules or vacations, or when
industries slow or shut down for a season
Cyclical Unemployment
..., unemployment directly related to swings in the business cycle
Real Wage Unemployment
..., unemployment that exists when real wages (wages adjusted for inflation) in the
economy get pushed up above their equilibrium, either by the government or by trade
unions.
Inflation
..., an economic situation in which there is more money with less value
Demand-Pull Inflation
..., increases in the price level (inflation) resulting from an excess of demand over output
at the existing price level, caused by an increase in aggregate demand
Cost-Push Inflation
..., theory that higher wages and profits push up prices
Deflation
..., a contraction of economic activity resulting in a decline of prices
Direct Taxation
..., taxes imposed on people's income or wealth, and on firms' profits. Unavoidable,
because households and firms are obliged to declare their full income to governments
and pay taxes on it accordingly.
Indirect Taxation
..., A tax on expenditure or consumption. It is added to the selling price of a good or
service and is sometimes known as an avoidable tax.
Progressive Taxation
..., tax rates increase with income. policy to help reduce inequality, tax wealthier people
and redistribute money to poor through welfare
Regressive Taxation
..., A system of taxation in which tax is levied at a decreasing average rate as income
rises. This form of taxation takes a greater proportion of tax from the low-income
taxpayer than from the high-income taxpayer.
Proportional Taxation
..., an income tax that everyone pays at the same rate, whatever the income level
1. Business Inventories-- Additions or deletions to existing inventory levels in
response to economic conditions (a flow variable).
2. Business Cycle -- An economic contraction (recession) followed by an
expansion.
3. Capital Gain -- A positive difference between the sale price of an asset and its
purchase price.
4. Capital Loss -- A negative difference between the sale price of an asset and its
purchase price.
5. Constant Returns to Scale (CRS)--A long run production concept where a
doubling of all factor inputs exactly doubles the amount of output.
6. Consumer-- An economic agent that desires to purchase goods and services
with the goal of maximizing the satisfaction (utility) from consumption of those
goods and services.
7. Consumer Price Index (CPI)-- A weighted average of the prices of a
representative market basket of goods and services that represents consumption
patterns in some base time period.
8. Deflation-- A decline in the aggregate price level over some defined time period.
9. Demand-- A relationship between market price and quantities of goods and
services purchased in a given period of time.
10. Depreciation-- A measure of the wear and tear that affects capital equipment or
other intermediate goods.
11. Diminishing Marginal Productivity (DMP)--A short run production concept where
increases in the variable factor of production lead to less and less additional
output.
12. Direct Finance The transfer of loanable funds through the use of capital markets
(i.e., the Stock and Bond markets) usually facilitated by investment banks.
13. Disinflation-- A decline in the overall rate of inflation. Prices are still rising but by
a smaller amount relative to previous time periods.
14. Disintermediation-- The removal of funds from a financial intermediary (a bank or
other depository institution).
15. Disposable Personal Income--Personal Income less taxes paid.
16. Durable Goods-- Goods that deliver consumption services over an extended
period of time.
17. Economic Expansion-- Growth in Real GDP for one fiscal quarter or more.
18. Economics-- The study of how a given society allocates scarce resources to
meet (or satisfy) the unlimited wants and need of its members.
19. Employment-- A measure of those individuals in the labor force working, at least
one hour per week, for pay.
20. Equilibrium-- In economics, economic equilibrium is a state where economic
forces such as supply and demand are balanced and in the absence of external
influences the (equilibrium) values of economic variables will not change.
21. Exchange Rate-- The value of a domestic currency expressed in terms of a
22. Human Capital/Wealth A measure of the skills, ability or productivity of human
beings.
23. Implicit Price Deflator (IPD)-- The ratio between Nominal GDP and Real GDP.
24. Income Producing Asset-- An asset that is used to generate revenue from the
production and sale of goods and services.
25. Indirect Business Taxes-- Taxes that tend to be built into the price of a particular
good (i.e., excise taxes).
26. Income Taxes-- Taxes that are based on and vary with personal or corporate
income.
27. Indirect Finance-- The transfer of loanable funds (deposits) through the use of
financial intermediaries (commercial banks).
28. Induced Expenditure-- Changes in spending due to changes in (national) income.
See the Marginal Propensity to Spend.
29. Inflation-- An increase in the price level over some defined time period.
30. Liquidity-- A measure of the ease by which a financial asset can be converted
into a form readily accepted as payment for goods and services.
31. Liquidity Premium-- An adjustment to a real interest rate to compensate for the
32. Marginal Propensity to Spend-- The fraction of each additional dollar of income
devoted to any type of spending (i.e., consumption, investment, government, or
net exports).
33. Market-- A place or institution where buyers and sellers come together and
exchange factor inputs or final goods and services. A market is one of several
types of economic rationing systems.
34. Money Market Instrument-- A short term (less than 10 years) debt instrument.
35. Money Multiplier-- The relationship between changes in the monetary base and
the money supply.
36. Monetary Base-- Also known as High-powered Money. Reserves + Currency in
the monetary system -- the main liabilities of the central bank.
37. National Income -- The sum of all types of income (wages, net interest, profits,
and net rental income) earned in a given time period by any type of economic
agent (individuals or corporation).
38. Natural Rate of Unemployment-- That rate of unemployment where there is
neither upward nor downward pressure on prices.
39. Net Investment -- Investment exclusive of replacement of depreciated capital.
40. the Phillips Curve-- A theoretical relationship between the unemployment rate of
a given economy and rates of (wage) inflation.
41. Potential Output-- A measure of the economy's ability to produce goods and
services.
42. Present Value-- The value of a future payment or stream of
payments discounted by some appropriate rate of interest.
43. Primary Stock/Bond Market --The market where new shares of stock or new
bonds are bought and sold. Activity in this market represents direct
finance where actual borrowing and lending activity takes place.
44. Producer-- An economic agent that converts inputs (factors of production) into
output (goods and services) with the goal of maximizing profits from production
and sale of those goods and services.
45. Profits-- The difference between sales revenue and the costs of production..
46. The Quantity Equation-- Also known as the Equation of Exchange, an identity
relating the amount of money in circulation to the price level and level of output in
an aggregate economy.
47. Rate of Time Preference-- The equivalent of a personal interest (or discount)
rate. The measure by which individuals compare current and future economic
activity.
48. Real GDP-- GDP measured at constant (some base period) prices.
49. Real Interest Rate-- An interest rate that has been adjusted for changes in the
price level or changes in purchasing power over some time period.
50. Recession--Negative growth in Real GDP for two or more fiscal quarters.
51. Relative Price-- A ratio of any two prices or one particular price compared to a
price index.
52. Risk-- A measure of uncertainty about the value of an asset or the benefits of
some economic activity.
53. Risk Premium-- An adjustment to a real interest rate to compensate for
uncertainty in the ability of a borrower to service a loan.
54. Scarcity-- A physical or economic condition where the quantity desired of a good
or service exceeds the availability of that good or service in the absence of a
rationing system.
55. Shortage-- A market condition where the quantity demanded of a particular good
or service exceed the quantity available.
56. Speculation-- The purchase of a good or asset not intended for final consumption
but rather in the expectation of future sale at some higher price.
57. Standard of Living--The ratio of the output of an economy and population. Also
known as per-capita output.
58. Stock Variable-- A variable measured at point in time.
59. Supply-- A relationship between market price and quantities of goods and
services made available for sale in a given period of time.
60. Surplus-- A market condition where the quantity supplied exceeds the quantity
demanded.
61. Transitory Income -- Unexpected changes or shocks to individual income. Often
measured as the difference between observed income and permanent income.
62. Utility-- A measure of the satisfaction received from some type of economic
activity (i.e., consumption of goods and services or the sale of factor services).
63. Velocity--The number of times a given quantity (stock) of money changes hands
in a given time period (the ratio of expenditure in that time period to a given
measure of the money supply).
64. Yield-- The ratio between the flow of returns (income, revenue, profits) generated
by an asset and the purchase price of that asset.