Basic Macroeconomic Terminology


Oct 28, 2013 (3 years and 5 months ago)


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 gro
ss private
domestic investment, G is gross public consumption and investment and X is net exports (exports


Gross National Product (GNP):

the market value of all final goods and services produced in a year by nationally
owned resources regardles
s 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

Price index:

measures price level changes over time.

price index:
measure of prices across the economy that reflects all of the categories of goods and
services includ
ed in GDP.

Consumer price index (CPI):
measure of the average price of goods and services purchased by the typical

Producer price index (PPI):

measure of average prices received by producers.

Cost of Living Adjustment (COLA):

increase in wages t
hat is designed to match increases in prices of items
purchased by the typical household.


a sustained rise in the average level of prices

pull inflation:
inflation caused by increasing demand for output

push inflation:

inflation ca
used by rising costs of production


a positive inflation rate that decreases over time


a negative rate of inflation

Business cycle:

the rise and fall of real GDP over time.


a period in which real GDP falls (must be at
least two consecutive quarters)

a severe, prolonged economic contraction

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 unemployme
nt rate that exists in the absence of cyclical

Relates unemployment to real GDP.

Accelerating Inflation Rate of Unemployment (NAIRU):

the unemployment rate that exists with price
stability. Relates the unemployment rate to the inflatio
n rate.

Potential RGDP:
The maximum long
run sustainable level of output. The output produced at the natural rate of

Aggregate Demand (AD):
reflects the relationship between aggregate expenditures and the average price level.
The factors t
hat 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 pote
ntial 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 prod
uction capacity through technology improvements,
availability of resources and/or the improvement of the quality of resources.


the point where AD=AS. Long run equilibrium occurs when AD=SRAS=LRAS and the rate of
unemployment equals the natur
al rate of unemployment.





Neutrality of Money:

Changes in the money supply has no long run real effects on the economy (i.e. cannot
expand potential real GDP)