Unit 2

• In the United States, we have a mixed economy called capitalism or free enterprise, with the government as a third economic actor
• Gross Domestic Product (GDP)

  The total value of all final goods and services produced within a country in a calendar year
• Methods for calculating GDP

  1. Value-added approach

  2. Income approach

  3. Output expenditure model
• Output expenditure model for calculating GDP

  GDP = C + I + G + Xn (Consumption + Investment + Government purchases + Net exports)
• Items not counted in GDP: used items, intermediate goods, financial transactions
• GDP per capita

  GDP divided by the population of a country, used to determine a country's standard of living
• Limitations of using GDP per capita as a measure of standard of living: underground economy, home production, bads counted as goods, income distribution
• Unemployment


  Not working and actively looking for work
• Types of unemployment

  • Frictional
  • Structural
  • Cyclical
• Natural rate of unemployment

  Frictional unemployment plus structural unemployment
• Inflation


  General increase in prices throughout the entire economy
• GDP deflator


  Tracks price changes for all products within an economy
• Calculating GDP deflator

  Nominal GDP / Real GDP x 100
• Inflation helps borrowers but hurts savers and banks
• Business cycle

  Natural ups and downs in a market-based economy's economic activity over time
• Phases of the business cycle

  • Expansions
  • Contractions (recessions)
  • Peaks
  • Troughs
• Inflationary gap


  Actual output above long-run potential output
• Recessionary gap


  Actual output below long-run potential output
• Economic growth is the upward trend in the economy's long-run potential output