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| Circular Flow Diagram | This model shows how households and firms circulate resources, goods, and incomes through the economy. The basic model is expanded to include the government and the foreign sector. |
| Aggregation | The process of summing the microeconomic activity of households and firms into a macro measure of economic activity. |
| Gross Domestic Product | The market value of the final goods and services produced within a nation in a given period of time. |
| Exports | Goods and services sold to other countries. |
| Imports | Goods and services purchased from other countries. |
| Final Goods | Goods ready for their final use by consumers and firms. |
| Intermediate Goods | Goods that require further modification before they are ready for their final use by consumers and firms. |
| Double Counting | The mistake of including the value of intermediate stages of production in gross domestic product on top of the value of the final good. |
| Secondhand Sales | Final goods and services that are resold. |
| Nonmarket Transaction | Household work or do-it-yourself jobs that are missed by gross domestic product accounting. |
| Underground Economy | The unreported or illegal activity, bartering, or informal exchange of cash for goods and services that will not be reported in official tabulations of gross domestic product. |
| Expenditure Approach | The sum of all spending from four sectors of the economy. |
| Income Approach | The sum of all income earned by suppliers of resources in the economy. |
| Nominal GDP | The value of current production at the current prices. |
| Real GDP | The value of current production, but using prices from a fixed point in time. |
| Base Year | The year that serves as a reference point for constructing a price index and comparing real values over time. |
| Price Index | A measure of the average level of prices in a market basket for a given year, when compared to the prices in a reference (or base) year. |
| Market Basket | A collection of goods and services used to represent what is consumed in the economy |
| GDP Deflator | The price index that measures the average price level of the goods and services that make up GDP. |
| Real Rate of Interest | The cost of borrowing to fund a investment and equal to the nominal interest rate minus the expected rate of inflation. |
| Anticipated Inflation | The inflation expected in a future time period. This expected inflation is added to the real interest rate to compensate for lost purchasing power. |
| Nominal Rate of Interest | The interest rate unadjusted for inflation. The opportunity cost of holding money in the money market. |
| Business Cycle | The periodic rise and fall in economic activity around its long-term growth trend. |
| Expansion | A period where real gross domestic product is growing. |
| Peak | The top of the business cycle where an expansion has ended and is about to turn down. |
| Contraction | A period where real gross domestic product is falling. |
| Recession | Roughly determined by two or more consecutive quarters of falling real gross domestic product. |
| Trough | The bottom of the cycle where a contraction has stopped and is about to turn up. |
| Depression | A prolonged, deep trough in the business cycle. |
| Consumer Price Index | The price index that measures the average price level of the items in the base year market basket. |
| Inflation | An increase in the overall price level. |
| Nominal Income | Today's income measured in today's dollars, unadjusted by inflation. |
| Real Income | Today's income measured in base year dollars. These inflation adjusted dollars can be computed from year to year to determine whether purchasing power has increased or decreased. |
| Employed | A person is employed if he or she has worked for pay at least one hour per week. |
| Unemployed | A person is unemployed if he or she is currently not working but is actively seeking work. |
| Labor Force | The sum of all individuals 16 years and older who are either currently employed or unemployed. |
| Not in the Labor Force | A person is classified as not in the labor force if he or she has chosen to not seek employment. |
| Unemployment Rate | Unemployed/Labor Force * 100 |
| Discouraged Workers | Citizens who has been without work for so long that they become tired of looking for work and drop out of the labor force. Because these citizens are not counted in the ranks of the unemployed, the reported unemployment rate is understated. |
| Frictional Unemployment | A type of unemployment that occurs when someone new enters the labor market or switches jobs. This is a relatively harmless form of unemployment and is not expected to last long. |
| Structural Unemployment | A type of unemployment that is the result of fundamental, underlying changes in the economy such that some job skills are no longer in demand. |
| Cyclical Unemployment | A type of unemployment that rises and falls with the business cycle. This form of unemployment is felt economy-wide, which makes it the focus of macroeconomic policy. |
| Full Employment | Exists when the economy is experiencing no cyclical unemployment. |
| Natural Rate of Unemployment | The unemployment rate associated with full employment, somewhat between 4 percent and 5 percent in the United States. |
| Disposable Income | The income a consumer has left over to spend or save once he or she has paid net taxes. |
| Marginal Propensity to Consume | The change in consumption caused by a change in disposable income. |
| Marginal Propensity to Save | The change in saving caused by a change in disposable income. |
| Multiplier Effect | The idea that a change in any component of aggregate demand creates a larger change in gross domestic product. |
| Spending Multiplier | The amount by which real gross domestic product changes due to a change in spending. 1/(1-MPC) |
| Tax Multiplier | The amount by which real domestic product changes due to a change in taxes. -MPC/(1-MPC) |
| Balanced Budget Multiplier | A change in government spending offset by an equal change in taxes results in a multiplier effect equal to one. |
| Aggregate Demand | Measures the sum of consumption spending by households, investment spending by firms, government purchases of goods and services, and the net exports bought by foreign consumers. The inverse relationship between all spending on domestic output and the average price level of that output. |
| International Effect | The process of domestic consumers looking for goods produced abroad when the domestic price level rises, thus reducing the quantity of domestic output consumed. |
| Interest Rate Effect | The process of reduced domestic consumption due to a higher price level causing an increase in the real interest rate. |
| Wealth Effect | As the average price level rises, the purchasing power of wealth and savings begins to fall. Higher prices, therefore, tend to reduce the quantity of domestic output purchased. |
| Determinants of Aggregate Demand | AD is a function of the four components of domestic spending (C + I + G + (X-M)). If any of these components increases (decreases), holding the others constant, AD increases (decreases), or shifts to the right (left). |
| Aggregate Supply | The positive relationship between the level of domestic output produced and the average price level of that output. |
| Sticky Prices | The case when price levels do not change, especially downward, with changes in aggregate demand. |
| Sticky Wages | The case when wage levels do not change, especially downward, with changes in aggregate demand. |
| Macroeconomic Short Run | A period of time during which the prices of goods and services are changing in their respective markets, but the input prices have not yet adjusted to those changes in the product markets. During the short run, the aggregate supply curve has an upward slope. |
| Macroeconomic Long Run | A period of time long enough for input prices to have fully adjusted to market forces, all input and output markets are in equilibrium, and the economy is operating at full employment gross domestic product. Once all markets in the economy have adjusted and there exists this long-run equilibrium, the aggregate supply curve is vertical at full employment gross domestic product. |
| Determinants of Aggregate Supply | Aggregate supply is a function of many factors that impact the production capacity of the nation. If these factors make it easier, or less costly, for a nation to produce, AS shifts to the right. If these factors make it more difficult , or more costly, for a nation to produce, AS shifts to the left. |
| Macroeconomic Equilibrium | Occurs when the quantity of real output demanded is equal to the quantity of real output supplied. Graphically this at the intersection of aggregate demand and aggregate supply. Equilibrium can exist at, above, or below full employment. |
| Recessionary Gap | The amount by which full employment gross domestic product exceeds equilibrium real GDP. |
| Inflationary Gap | The amount by which equilibrium real gross domestic product exceeds full employment GDP. |
| Demand Pull Inflation | Inflation that is the result of stronger aggregate demand as it continues to increase in the upward sloping range of aggregate supply. |
| Deflation | A decline in the overall price level. |
| Recession | A recession is seen as a leftward shift of AD. |
| Stagflation | Stagflation is seen as a leftward shift of AS. |
| Productivity | The quantity of output that can be produced per worker in a given amount of time. |
| Human Capital | The amount of knowledge and skills that labor can apply to the work done. |
| Nonrenewable Resources | Natural resources that cannot replenish themselves. Fossil Fuels and copper. |
| Renewable Resources | Natural resources that can be replenish themselves if they are not overharvested. Timber and Fish. |
| Technology | A nation's knowledge of how to product goods in the best possible way. |
