National Income Accounting EX: Collects stats for

how corporations decide to invest

A system that collects macroeconomic statistics on
production, income, investment, and savings
National Income and Product Accounts EX:
Determines what economic policies need to be put in
place
NIPA
Gross Domestic Product (GDP) EX: A Japanese
company that makes cars in Ohio is included in the U.S.s
GDP.
The dollar amount of all final goods and services produced
within a country's borders in a year
Expenditure Approach EX: This approach includes
the total annual expenditures for durable and nondurable
goods.
Totals annual expenditures on four categories of final
goods or categories services
Consumer, Business, Government, Net exports
or imports of goods or services EX: Consumer
goods includes goods such as refrigerators, food, and
even light bulbs.

Four categories of final goods or services

Income Approach EX: When a firm sells a product,
the selling price represents income for the firms owners
and employees.
Calculates GDP by adding up all the incomes in the
economy
Gross National Product (GNP) EX: A measure of the
market value of all good and services produced by
Americans in one year.
The annual income earned by U.S. owned firms and U.S.
citizens
Net National Product (NNP) EX: The NNP does not
reflect taxes in its measurement.
GNP minus deprecation of capital equipment

National Income (NI) EX: We can find out the pretax

income that businesses pay U.S. households after
reinvesting and paying taxes.
NNP minus sales and excise taxes
Personal Income (PI) EX: From this, we can find the
Disposable Personal Income for the U.S.

The total pre-tax income paid to U.S. households

Intermediate Goods EX: Sugar
Goods used in the production of final goods
Final Goods EX: A car
Goods that have been purchased for final use and not for
resale or further processing or manufacturing.
Durable Goods EX: Refrigerator
Goods that last a relatively long time, such as cars and
household appliances
Nondurable Goods EX: Sneakers
Goods that last a short period, such as food, light bulbs,
and sneakers.
Nominal GDP EX: When calculating what the GDP was
in an economy that outputs only cars and trucks, if you
use the current price from that year, it is Nominal GDP.
GDP measured in current prices
Real GDP EX: It avoids the problem of calculating an

increase in price as an increase in GDP when output has

not increased.
GDP expressed in constant, or unchanging, prices
Depreciation EX: The cost of replacing physical capital
that has deprecated reduces the value of the what we
produce.
The loss of the value of capital equipment that results from
normal wear and tear
Price Level EX: When the price of goods and dervices
change, the price level changes.
The average of all prices in the economy
Aggregate Supply EX: The short-term aggregate
supply curve only shifts in response to the aggregate
demand curve.
The total amount of goods and services in the economy
available at all possible price levels
Aggregate Demand EX: Both domestic and foreign
consumers and the government can affect aggregate
demand.
The amount of goods and services in the economy that will
be purchased at all possible price levels

Business Cycle EX: Only major changes in the GDP are

accounted for in the business cycle.
A period of macroeconomic expansion followed by a period
of contraction
Expansion EX: The economy has more jobs and the
unemployment rate drops.
A period of economic growth as measured by a rise in real
GDP
Economic Growth EX: A long-term expansion in the
economy
A steady, long term increase in real GDP
Peak EX: The economy is at its most prosperous point in
that period of time.
The height of an economic expansion, when real GDP stops
rising
Contraction EX: Falling output causes unemployment
to rise, which cause a contraction to occur.
A period of economic decline marked by falling real GDP

Trough EX: Even though GDP has fallen to its lowest

point, the unemployment and price levels may vary.
The lowest point in an economic contraction, when real
GDP stops falling
Recession EX: A recession generally lasts between 6-18
months.
A prolonged economic contraction
Depression EX: A depression usually has high
unemployment and low factory output.
A recession that is especially long and severe
Stagflation EX:
A decline in real GDP combined with a rise in the price
level
Business Investment EX: Business investment
spending creates additional output and jobs that increase
GDP and continues the expansion.
When an economy is expanding, firms expect sales and
profits to keep rising, so they invest in new plants and
equipment

Interest Rate EX: If interest rate rises, consumers are

less likely to buy big ticket items.
Companies make new investments, often adding jobs to the
economy
Consumer Expectations EX: Reduced spending based
on consumer expectations can actually lead to a
contraction.
Expanding economy= more spendingFears of
recession=decreased spending
External Shocks EX: Disruptive oil supply or wars
Events that greatly influence the output of an economy
Leading Indicators EX: Applications for
unemployment insurance
Key economic variables that economists use to predict a
new phase of a business cycle
Real GDP Per Capita EX: If GDP is rising faster than
the population, real GDP per capita will rise as well.
Real GDP divided by the total population
Capital Deepening EX: More physical capital will lead

to more output
Process of increasing the amount of capital per worker
Saving EX: If you received an income of $50,000 and
spent $20,000 of it, then the $30,000 you have left is
considered saving.
Income not used for consumption
Savings Rate EX: The U.S. has a low savings rate.
The proportion of disposable income that is saved
Technological Progress EX: New scientific knowledge
or new machines
An increase in efficiency gained by producing more output
without using more inputs
Population Growth EX: Population growth does not
always mean economic growth.
If population grows while the supply of capital remains
constant, the amount of capital per worker can shrink
Government EX: If the government raises taxes to pay
for additional services, then U.S. households will have
less money.

Raising or lowering taxes can raise or lower savings which

raises or lowers investments
Foreign Trade EX: Not all trade deficits promote
capital deepening
Trade deficits can sometimes increase capital deepening if
the imports consist of investment goods rather than
consumer goods
Frictional Unemployment EX: Getting laid off or
taking time off to find the job that is right for you
Unemployment that occurs when people take time to find a
job
Seasonal Unemployment EX: A lawn mowing service
is no longer needed in the winter when snow is on the
ground
Unemployment that occurs as a result of harvest schedules
or vacations, or when industries slow or shut down for a
season
Structural Unemployment EX: Development of new
technology or globalization
Unemployment that occurs when workers' skills do not
match the jobs that are available

Cyclical Unemployment EX: During a recession,

demand for labor decreases.
Unemployment that rises during economic downturns and
falls when the economy improves
New technology, New resources, Change in
consumer demand, Globalization, Lack of
education EX: The compact disc decreased the need for
phonograph records, which lead to unemployment in the
record-producing field.
Five Major Causes of Structural Unemployment
Census EX: Samples of 50,000 families are used to
represent the entire population of the U.S. each month
An official count of the population
Unemployment Rate EX: The BLS computes the
unemployment for the U.S.
The percentage of the nation's labor force that is
unemployed
Full employment EX: Full employment is around 46% unemployment in a properly working economy.
The level of employment reached when there is no cyclical
unemployment

Underemployment EX: People who cant find jobs

that meet their skill level, they have to settle for a lower
skill and wage job.
Working at a job for which one is over-qualified, or
working part-time when full-time work is desired
Discouraged Worker EX: Although they dont have a
job, discouraged workers are not included in the
unemployment rate.
A person who wants a job but has given up looking
Inflation EX: Prices in the American economy usually
rise.
A general increase in prices
Purchasing Power EX: When prices rise, purchasing
power declines.
The ability to purchase goods and services
Price Index EX: Using a price index, economists can
see how much prices have changed over time.
A measurement that shows how the average price of a
standard group of goods changes over time

Consumer Price Index (CPI) EX: The Bureau of

Labor Statistics computes the CPI each month.
A price index determined by measuring the price of a
standard group of goods meant to represent the "market
basket" of a typical urban consumer
Market Basket EX: The market basket is divided into
eight categories of goods and services.
A representative collection of goods and services
Inflation Rate EX: To calculate inflation rate, just
subtract month A from month B for year A and year B.
The percentage rate of change in price level over time
Core Inflation Rate EX: In order to calculate longterm trends in inflation, economists have developed the
core inflation rate.
The rate of inflation excluding the effects of food and
energy prices
Hyperinflation EX: When inflation rates are 100 or
even 500% per month.
Inflation that is out of control
Quantity Theory EX: The University of Chicago

developed a version of this theory in the 1950s and

1960s.
Theory that too much money in the economy causes
inflation
Demand-Pull Theory EX: Wartime is when the
demand-pull theory is seen clearly.
Theory that inflation occurs when demand for goods and
services exceeds existing supplies
Cost-Push Theory EX: Higher prices for raw materials
can cause costs to increase.
Theory that inflation occurs when producers raise prices in
order to meet increased costs
Wage-Price Spiral EX: A wage increase in a company
causes an increase in a companys products, which causes
a demand for higher wages from employees, etc.
The process by which rising wages cause higher prices, and
higher prices cause higher wages
Fixed Income EX: Inflation can eat away at the real
value of these checks.
An income that does not increase even though prices go up

Deflation EX: Rising unemployment and falling capital

investment
A sustained drop in the price level
Poverty Threshold EX: If a familys total income is
below the poverty threshold, then the whole family is
counted as poor.
An income level below that which is needed to support
families or households
Poverty Rate EX: This rate can be used to to determine
the factors that cause poverty.
The percentage of people who live in households with
income below the official poverty line
Income Distribution EX:
How the nation's total income is distributed among its
population
Food Stamps EX:
Government issued coupons that can be redeemed for food
Lorenz Curve EX: A straight diagonal line on the graph
represents complete equality in income distribution.

The curve that illustrates income distribution

Enterprise Zone EX: Inner city areas
Area where companies can locate free of certain local,
state, and federal taxes and restrictions
Block Grant EX: Community Development Block Grant
Federal funds given to the states in lump sums
Workfare EX: This welfare program reduces poverty by
providing poor Americans with labor skills.
A program requiring work in exchange for temporary
assistance
Employment Assistance EX: The federal government
ensures that the minimum wage does not fall below a
certain point.
The minimum wage and federal and state job-training
programs aim to provide people with more job options
Aid to Families with Dependent Children EX:
AFDC was the traditional antipoverty program for poor
families in the U.S.
AFDC

Temporary Assistance for Needy Families EX:

TANF has a 5-year limit on receipt of benefits.
TANF