real gross domestic product (also called output or production): a measure of the value of all goods and services produced in a country during a certain time adjusted for inflation; does not include non market transactions
economic growth: long term upward trend in GDP reflecting an expansion of the economy over time.
economic fluctuations: short term swings in GDP that lead to deviations of the economy from its long term growth trend.
business cycles: short term fluctuations in real GDP and employment.
recession: a decline in real GDP that lasts for at least six months. (2 Quarters)
Depression: a huge recession
peak: the highest point of real GDP before a recession
trough: the lowest point of real GDP at the end of a recesion
expansion: the period between the trough of a recession and the next peak.
recovery: the period of expansion after a recession before GDP has returned to its last peak
Labor productivity: output per hour of work
labor force: anyone who is above the age of 16 and is employed or making an effort to find a job
unemployment rate: the percentage of the labor force that is unemployed.
inflation rate: the percentage increase in the overall price of goods from one year to the next.
CPI--consumer price index, PPI--producer price index
interest rate: the amount recieved perdollar loaned per year.
real interest rate: the interest rate less the inflation rate people expect
increases right before a recession, decreases right after.
nominal interest rate: the interest rate on a loan making no adjustment for inflation
potential GDP: the economy's long term trend for real GDP determined by the available supply of capital, labor and technology. Real GDP fluctuates above and below the potential GDP.
aggegrate supply: all the goods and services produced by the economy using avaliable labor, capital and technology
labor: the total numner of workers able to work to produce the real GDP
capital: factories, improvemants to cultivated land, machienery, and other tools equipment and structures used to produce goods and services.
technology: anything that raises the amount of output that can be produced with a given amount of labor and capital.
production function (aggegrate supply) : the relatrionshiop that describe outpouit as a function of labor, capital, and technology.
aggregate demand: the total demand for goods and services by consumers, businesses, government and foreigners. may fluctuate in the short term
Y=F( L, K, T) ---aggegrate supply, long term, production is a function of labor capital and technology
Macro economic Theory
1. Long-term economic growth is due primarily to increases in aggegrate supply/
Aggegrate supply depends of the availability of labor, capital, and technology, whose relationship to one another is expressed by the production function.
Potential GDP gradually increases over time
2. Short term economic fluctuations are due primarily to fluctuations in aggregate demand. real GDP fluctuates around potential GDP
fluctuactions in potential GDP play a smaller role
Macroeconomic Policy
To increase long-term growth:
1. fiscal policy should provide incentives to invest in capital, technology and labor
2. monetary policy should keep inflation low and stable
To reduce short term fluctuations:
1. fiscal and monetary policy should do no harm
2. these policies should try to mitigate changes in aggregate demand
Fiscal policy: Congress, president
Monetary Policy: Federal reserve, al greenspan
Thought put on learnlink:
In the first few chapters of Taylor's Macroeconomics book there is some discussion of the decrease in the rate of increase of the real GDP. The tone of this discussion turns ominous as Taylor describes how even a small decrease in the rate of increase of the real GDP can have a drastic effect on the standard of living years down the road.
Real GDP is defined as the measure of the value of all goods and services produced within a country during a certain time adjusted for inflation. This value does not include the value of goods and services produced in the home for domestic use, home cooked meals, grass mowed by a son or daughter, clothes washed, etc..
Industrialization, fast food, laundry mats, even large grocery stores are all relatively recent developments that have been in use for less than two centuries. During the last part of the 19th century and the first half of the 20 Th. America experienced a large movement of production from the home into the public business sector. These goods and services, previously not counted as part of the real GDP because they were produced at home, came to be considered as part of the GDP. Could this shift of production have been responsible for an inflation of the real GDP growth figures we saw in America in the first half of this century? And could some of the slowdown in the growth of the real GDP be because the GDP figures are no longer enjoying the added boost of home production moving into the public market? Perhaps with so many tasks already given over to the public market consumers have fewer private tasks to shift over to public production to provide additional annual increases. If home produced goods and services had been considered part of the GDP from the beginning would we have actually witnessed a decrease in the rate of increase of the real GDP this century?