Essential Economic Terms: Definitions of GDP, Inflation, and National Income

Fundamental Economic Concepts and Definitions

A comprehensive glossary covering core microeconomic and macroeconomic terms, national accounting metrics, and inflation measures.

Microeconomics and Macroeconomics

Microeconomics

The analysis of how individuals and firms make economic decisions and how these decisions interrelate within markets.

Macroeconomics

The study of the efficiency, performance, and structure of a country's economy as a whole.

National Wealth and Accounts

National Wealth

The difference between the monetary value of a state's assets (property and rights owned by a company, institution, or individual) and its liabilities (all debts and commitments owed by an enterprise, institution, or individual) at any given time.

National Accounts

The accounting system that records the value of the macro trends within the national economy.

Measuring National Output (GDP, GNP, NDP)

Gross Domestic Product (GDP)

The market value of all final goods and services, legally produced within the country during a given time period (usually a calendar year).

GDP Calculation Methods

• Demand Method: Family Consumption + Investment + Government Spending + Net Exports (Exports - Imports).
• Output Method: The sum of value added (increased wealth created by a firm through its activity) across all economic activities within the country.
• Income Method: The sum of all incomes earned in the economy.

Gross National Product (GNP)

The sum of all income earned by the permanent residents of a nation.

Net National Product (NNP)

Value of GNP minus depreciation.

Net Domestic Product (NDP)

GDP minus Depreciation (D).

Income Metrics and Formulas

National Income (NI)

All income received by residents of a country in return for their participation in the productive process.

Personal Income (PI)

Income families receive before taxes are levied.

Disposable Personal Income (DPI)

Income families have after paying taxes.

Income Per Capita

National Income / Number of inhabitants of a country.

Labor Market Metrics

• Unemployment Rate: (Unemployed / Labor Force) × 100
• Participation Rate: (Population greater than 16 / Total population over 16) × 100

Inflation and Price Indices

Inflation

A continuing rise in the general price level of goods and services.

Expected Inflation (Self-Constructed)

When traders anticipate and expect future price increases.

Price Deflator

An index used to convert nominal values into real terms (e.g., CPI and GDP Deflator).

Consumer Price Index (CPI)

(Cost of a basket of goods and services at a specific time / Cost of the same basket in the base period) × 100.

GDP Deflator

(Nominal GDP / Real GDP) × 100.

Types of Inflation

• Demand-Pull Inflation: Occurs when demand increases without a corresponding increase in the supply of goods.
• Cost-Push Inflation: Occurs when the cost of labor or raw materials increases significantly.