Macroeconomics Unit 2: Measurements of Econ Performance

Cyclical Unemployment

Unemployment caused by a fall in aggregate demand in a nation. Not included in the natural rate of unemployment. When a nation is in a recession, there will be cyclical unemployment.

Recession

A contraction in total output of goods and services in a nation between two periods of time.

GDP Deflator:

A price index used to adjust nominal GDP to arrive at real GDP. Called the "deflator" because nominal GDP will usually overstate the value of a nation's output if there has been inflation. The Consumer Price Index (CPI) is another commonly used price index.

Inflation (definition)

A rise in the average level of prices in the economy over time (percentage change in the CPI).

CPI (definition)

An index that measures the price of a fixed market basket of consumer goods bought by a typical consumer. The CPI is used to calculate the inflation rate in a nation.

Quantity Theory of Money

MV = PQ = Y. A monetarist's view that explains how changes in the money supply (M) will affect the price level (P) and/or real output assuming the velocity of money (V) is fixed in the short run. MPC + MPS = 1. The fraction of an increase in disposable income that is spent (MPC) plus the fraction that is saved (MPS) must equal 1."

Inflation Rate (CPI)

The inflation rate is the % change in the CPI from one period to the next.

Unemployment Rate

The labor force includes all non-institutionalized people of working age who are employed or seeking employment.

Natural Rate of Unemployment (NRU):

The level of unemployment that prevails in an economy that is producing at its full employment level of output. Includes structural and frictional unemployment. While countries' NRUs can vary, the NRU in the United States tends to be close to 5 percent.

Calculating Nominal GDP:

The quantity of various goods produced in a nation times their current prices, added together.

GDP (definition)

The total market value of all final goods and services produced during a given time period within a country's borders. Equal to the total income of the nation's households or the total expenditures on the nation's output.

GDP

This measurement = C + I + G + Xn: .

Structural Umemployment

Unemployment caused by changes in the structure of demand for goods and in technology; workers who are unemployed because they do not match what is in demand by producers in the economy or whose skills have been left behind by economic advancement.

Frictional Unemployment

Unemployment of workers who have employable skills, such as those who are voluntarily moving between jobs or recent graduates who are looking for their first job.

Full Employment

When an economy is producing at a level of output at which almost all the nation's resources are employed. The unemployment rate when an economy is at full employment equals the natural rate, and includes only frictional and structural unemployment. Full-employment output is also referred to as "potential output."