Essential Economic Terms and GDP Formulas

Essential Economic Terms and Definitions

• GDP: GDP is the monetary value of all the finished goods and services produced within a country's borders in a specific time period.
• Industrial Revolution: The transition to new manufacturing processes in Europe and the US, in the period from about 1760 to sometime between 1820 and 1840.
• Labor Force: The number of people who are employed plus the unemployed who are looking for work.
• Labor Force Participation Rate: The labor force participation rate refers to the number of people available for work as a percentage of the total population.
• Cyclical Unemployment: Cyclical unemployment is a factor of overall unemployment that relates to the regular ups and downs, or cyclical trends in growth and production, that occur within the business cycle.
• Inflation: Inflation is a sustained increase in the general price level of goods and services in an economy over a period of time.
• Marginal Tax Rates: A marginal tax rate is the tax rate incurred on each additional dollar of income. This method of taxation aims to fairly tax individuals based upon their earnings, with low-income earners being taxed at a lower rate than higher income earners.
• Barter: A system of exchange where participants in a transaction directly exchange goods or services for other goods or services without using a medium of exchange, such as money.
• Import Quotas: A type of trade restriction that sets a physical limit on the quantity of a good that can be imported into a country in a given period of time.
• Free Trade Agreement: A free trade agreement (FTA) is a treaty between two or more countries to facilitate trade and eliminate trade barriers. It aims at eliminating tariffs completely from day one or over a certain number of years.

GDP Calculation and Components

The formula to calculate the components of GDP is Y = C + I + G + NX. That stands for: GDP = Consumption + Investment + Government + Net Exports, which are exports minus imports. The formula to calculate the components of GDP is Y = C + I + G + NX. That stands for: GDP = Consumption + Investment + Government + Net Exports, which are exports minus imports.

Y = C + I + G + (X – M)

• X: Exports
• M: Imports

Taxation Systems

• Regressive Tax: Taxes low incomes more.
• Proportional Tax: Everyone pays the same.