Economics Chapter 1: Gross Domestic Product (GDP)

The total value of goods and services produced in a country during a specific period, typically a year.

GDP measured using current year prices. It reflects the actual dollar value of production.

GDP adjusted for inflation. It reflects the change in quantity of goods and services produced.

A measure of the average price level of goods and services consumed by households. It's used to calculate inflation.

The percentage change in the CPI over time. It measures the rate at which prices are rising.

Adjusting a nominal variable for inflation to get its real value. It helps to understand how much purchasing power a variable has.

A preferred measure of inflation by the Federal Reserve. It's a ratio of nominal consumer spending to real consumer spending.

A measure of inflation that excludes volatile food and energy prices. It aims to provide a better gauge of underlying inflation trends.

The maximum output an economy can produce when all resources are fully employed. It reflects the economy's potential.

The factors that influence long-run output, including labor, capital, and technology.

The increase in total output from employing one additional unit of labor (holding capital constant). It's the slope of the production function with respect to labor.

The increase in total output from employing one additional unit of capital (holding labor constant). It's the slope of the production function with respect to capital.

The principle stating that as you increase one input (e.g., labor) while holding other inputs constant (e.g., capital), the additional output from each additional unit of that input will eventually decrease.

The real wage equals the marginal product of labor. Workers get paid based on their contribution to the production.

The real rental price of capital equals the marginal product of capital. Capital owners are paid based on their contribution to the production.

Variables whose values are determined within the model itself. They are solved for by the model, and their values depend on the relationships and interactions defined within the model.

Variables whose values are taken as given by the model. Their values are determined outside the model, and their behavior is not explained within the model.

The spending by households on goods and services. It includes durable goods that last a long time (like cars), nondurable goods that are consumed quickly (like food), and services.

The spending on capital goods, which are physical assets used in future production processes. It includes business fixed investment (plant and equipment), residential fixed investment (new housing), and inventory investment (changes in the value of inventories).

In 2023, when $10,000 worth of cars were produced and sold, this amount is included in 2023 GDP as inventory investment. However, when those same cars were sold in 2024, the $10,000 value is not counted in 2024 GDP, as it was already accounted for in the previous year.

Government spending on goods and services, such as national defense, infrastructure projects, and public services, contribute to GDP.

Transfer payments like unemployment benefits are not included in GDP because they represent income redistribution rather than spending on goods and services.

Net Exports (NX) are the difference between a country's exports and imports. A positive NX means a country exports more than it imports, contributing to GDP.

The value added represents the increase in the value of a good or service at each stage of production. It's calculated by subtracting the value of intermediate goods from the value of output.

GDP measures the total value of final goods produced, which already includes the value of intermediate goods. We avoid double counting by only including final goods in GDP.

GNP considers the income earned by a country's residents, regardless of location. GDP, on the other hand, focuses on the income generated within a country's borders, regardless of the nationality of the income earners.