Basic Macroeconomic Terminology
Gross Domestic Product (GDP):
the market value of all final goods and services produced in a year within a
GDP = C + I + G + X where C is gross private domestic consumption, I is gro
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
measures price level changes over time.
measure of prices across the economy that reflects all of the categories of goods and
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
inflation caused by increasing demand for output
used by rising costs of production
a positive inflation rate that decreases over time
a negative rate of inflation
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
the percentage of the labor force that is not working
Types of Unemployment:
due to short
term movement of workers between jobs.
caused by changes in technology or the structure of the economy.
arises because of the business cycle.
Natural Rate of Unemployment (NRU):
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
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)