Macroeconomics Test 2 Review
• GDP (Gross Domestic Product): Aggregate output as the dollar value of all final goods and services produced within the boarders of a country during a specific period of time
• Expenditures Approach: The method that adds all expenditures for all final goods and final services to measure the GDP
• GDP= C + Ig + G + Xn
o Personal Consumption Expenditures (C): Covers all expenditures by households on goods and services
o Gross Private Domestic Investment (Ig): Expenditures for newly produced capital goods and for additions to inventories
 Net Investment=
Gross Investment – Depreciation
o Government Purchases (G): All government expenditures on final goods and all direct purchases of resources
o Net Export (Xn): Exports (X) – Imports (M)
• Income Approach: The method that adds all the income generated by the production of final goods and final services to measure the GDP
• Wages
• Rents
• Interest
• Profits
• Statistical Adjustment
• Intermediate Goods: Products that are purchased for resale or further processing or manufacturing.
• Value Added: The values of a product sold by a firm less the value of the products (materials) purchased and used by the firm to produce that product
• Net Domestic Product: The nations total output available for consumption or additions to the capital stock.
• NDP= GDP – Consumption of Fixed Capital (Depreciation)
• National Income= (NDP – Statistical discrepancy) + Net Foreign Factor Income
• Personal Income= National Income – Taxes on Production and Imports – Social Security Contributions – Corporate Income Taxes – Undistributed Corporate Profits + Transfer payments
• Disposable Income= C + S
• Nominal GDP: GDP based on the prices that prevailed when the output was produced
• Real GDP: GDP that has been deflated or inflated to reflect changed in the price level
• Price Index: A measure of the price of a specified collection of goods and services, in a given year as compared to the price of an indentical collection of goods and services in a reference year
• Price Index Price= (Price of market basket in specific year) / (Price of some market basket in base year)

Chapter 8
• Economic Growth: An increase in Real GDP occurring over some time period; An increase in Real GDP per capita occurring over some time period
• Real GDP Per Capita: The amount of real output per person in a country
• Real GDP per Capita= Real GDP/ Population
• Rule of 70: Provides a quantitative grasp of the effect of economic growth
• It finds the numbers of years it will take for some measure to double, given its annual % increase, by dividing that percentage increase into the # 70
• Approximate # of years 70 /
required to = Annual Percentage
double real GDP Rate of Growth

Chapter 9
• Four Phases of the Business Cycle: Peak, Recession, Trough and Expansion
• Peak: Business activity is at maximum, price level rises, economy is at or near full employment, level of real output is at or close economy’s capacity
• Recession: Decline in total output, income, and employment
• Trough: Output and employment bottom out at their lowest levels
• Expansion: Real GDP, income, and employment rise
o Inflation can occur in expansion because there can be more spending than production capacity
• Unemployment Rate: The percentage of the labor forced unemployed
• Unemployment Rate= Unemployed / Labor Force
o Unemployed= Labor Force – Employed
• Three Types of Unemployment: Frictional Unemployment, Structural Unemployment, and Cyclical Unemployment
• Frictional Unemployment: Workers who are either searching for jobs or waiting to take jobs in the near future
• Structural Unemployment: Workers who skills are not demanded by employers
• Cyclical Unemployment: Caused by sufficient spending and begins in the recession phase
• Natural Rate of Employment: The economy is said to be producing its potential output
• Opportunity Cost of Unemployment? Lost production output
• GDP Gap= Actual GDP – Potential GDP
• Okun’s Law: For every 1% by which the actual unemployment rater exceeds the natural rate, a negative GDP gap of about 2% occurs
• Consumer Price Index: Measures the prices of a fixed market basket of some 300 goods and services bought by a typical consumer
• CPI= (Price of the most recent market basket in the production year) / (Price estimate of the market basket in 1982-1984) X 100
• Rate of Inflation= (CPI from one year – CPI from previous year) / (CPI from previous year) X 100
• 2 types of inflation: Demand-Pull and Cost-Push
• Demand-Pull Inflation: Too much spending chasing too few goods
• Cost-Push Inflation: Increasing the price level resulting from an increase in resource cost
• Per-Unit Production Costs: The average cost of a particular level of output
• Per-Unit Production Cost= (Total Input Cost) / (Units of Output)


• Income Consumption and Saving have a direct or positive relationship
• Disposable Income= C