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Circular Flow, GDP

Business Cycle

The short-run alternation between economics downturns and upturns (recessions and expansions


A very deep and prolonged downturn


A period of economics downturn when output and employment are falling


A.k.a. Recovery, A period of upturn when output and employment are falling


Total number of people currently employed in the economy


Total number of people currently looking for work but not currently employed

Unemployment rate

Percentage of labor force that is unemployed

Labor Force

The sum of employment and unemployment


The quantity of goods and services produced

Aggregate Output

The economy's total production of goods and services for a given time period


A rise in overall price level


A fall in overall price level

Price Stability

Aggregate price level is changing only slowly

Economic Growth

An increase in the maximum possible output of an economy


A simplified representation used to better understand a real-life situation

Ceteris Paribus

All other things equal, or all other relevant factors remain unchanged

National Income and Product Accounts

Keep track of flows of money between different sectors of the economy

National Accounts

National Income and Product Accounts


Either an individual or group of people who share their income


An organization that produces goods and services for sale or employs members of a household

Product Markets

Where goods and services are bought and sold

Factor Markets

Where resources, especially capital and labor, are bought and sold

Consumer Spending

A household spending on goods and services


a share in the ownership of a company help by a stakeholder


a loan in the form of an IOU that pays interest

Government Transfers

payments that the government makes to individuals without expecting a good or service in return

Disposable Income

Income + Government Transfers- Taxes

Private Savings

Disposable Income-Consumer Spending

Financial Markets

The banking, stock, and bond markets, which channel private savings and foreign lending to investment spending, government borrowing, and foreign borrowing

Government Borrowing

The amount of funds borrowed by the government in the financial markets

Government purchases of goods and services

Total expenditures on goods and services by federal, state, and local governments


Goods and services sold to other countries


Goods and services purchased from other countries


Stocks of goods and raw materials held to facilitate business operations

Investment Spending

Spending on new, productive physical capital and on changes in inventories

Final Goods and Services

Goods and services sold to the final, or end, user

Intermediate Goods and Services

Goods and services bought by one and sold to another

Gross Domestic Product (GDP)

total value of all final goods and services produced in an economy during a given period

Aggregate spending

Total spending on domestically produced final goods and services in the economy, = sum of consumer spending, investment spending, government purchases of goods and services, and exports minus imports (C + I + G + (X-IM))

Value Added

Value of sales minus value of purchases of inputs

Net Exports

The difference between the value of the imports and the exports(X-IM)

Real GDP

The total value of all final goods and services produced in the economy during a given year, calculated using the prices of a selected base year (Q x P at base year prices)

Aggregate Output

The total quantity of final goods and services produced within an economy

Nominal GDP

The total value of all final goods and services produced in the economy during a given year, calculated with the prices current in the year in which the output is produced


The method of calculating changes in real GDP using the average between the growth rate calculated using an early base year and the growth rate calculated using a late base year

GDP per capita

GDP divided by the size of the population; is equal to the average GDP per person

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