In the 1930s, during the Great Depression, the stock market crash, combined with droughts, falling prices, bank failures, and one out of four workers unemployed, policy-makers saw the need for a systematic way of understanding national and international economies, to measure things like the unemployment rate, inflation or deflation rates, economic output and growth, interest rates, wages and prices. At that time, economic decisions were made on sketchy and incomplete data.
They knew they needed to collect more data, develop theories, make predictions on how national policies might influence employment and other factors. Thus, macroeconomics was born. President Harry Truman famously said, after listening to economists drone “on the one hand…on the other hand,” Truman exclaimed, “Please give me a one-armed economist!”
GDP: “The most important measure of an economy is Gross Domestic Product or GDP. GDP is the value of all final goods and services produced within a country’s border in a specific period of time, usually a year…consumer spending, business spending which is called investment, government spending, and net exports which is basically spending by other countries.” More on gdp.
Real GDP: The value of all goods and services in a nation adjusted for inflation. More on real gdp.
Inflation: Prices of a market basket of goods, plus consumer goods like cars and homes, rise over a period of time. “Too much inflation is bad because it decreases the purchasing power of money; it means you can buy less stuff with the same amount of money, which has all sorts of negative effects on the economy.” More on inflation.
Deflation: Falling prices. “Falling prices actually discourage people from spending since they might expect prices to fall more in the future. Less spending in the economy means GDP is gonna decrease and unemployment’s gonna increase, and that just becomes a vicious cycle.” More on deflation.
Recession: Two successive quarters or six months show a decrease in Real GDP. More on recession. More on recession.
Unemployment Rate: calculated by taking the number of people that are unemployed and dividing by the number of people in the labor force, times 100. Now this percentage represents the number of people that are actively looking for a job but just can’t find one. To be counted, people must be of legal working age and actively looking for work. More on the unemployment rate. More on the unemployment rate.
Frictional Unemployment: People are temporarily unemployed or between jobs. So if you quit your job and look for a new one, or if you’re just entering the labor force, then you’re frictionally unemployed. More on frictional unemployment.
Structural Unemployment: Workers are out of work because there’s less demand for that specific type of labor. More on structural unemployment.
Cyclical Unemployment: Joblessness due to a recession, when people stop buying stuff, so businesses lay off their workers and since workers have lower incomes, they stop buying stuff which means more people lose their jobs. More on cyclical unemployment.
Full Employment: An economy is considered to be at full employment when there’s only frictional and structural unemployment. This is called the natural rate of unemployment. This natural rate differs slightly between countries, in the United States it’s usually between 3 to 5 percent unemployment. More on full employment.
Business Cycle: Economies by nature expand and contract over time. It is impossible to create an always expanding free market economy with full employment, because supply and demand naturally fluctuate. More on the business cycle.