Key Economic Concepts and Definitions
Nominal GDP
The production of goods and services valued at current prices.
Real GDP
The production of goods and services valued at constant prices.
GDP Deflator
A price level indicator calculated by dividing nominal GDP by real GDP and multiplying the result by 100.
Gross Domestic Product (GDP)
The market value of all final goods and services produced within a country during a certain period.
Consumption (C)
Household spending on goods and services, excluding purchases of new housing.
Investment (I)
Spending on capital equipment, inventory, and structures, including household purchases of new housing.
Government Purchases (G)
Central, regional, and local government expenditures on goods and services.
Net Exports (NX)
Spending by foreigners on domestically produced goods (exports) minus spending by domestic residents on foreign goods (imports).
GDP Formula: GDP = C + I + G + NX
Gross National Product (GNP)
The total income received by the permanent residents (nationals) of a country.
Net National Product (NNP)
The total income of a country’s residents minus losses from depreciation.
Total Revenue
The total amount a firm receives from the sale of its output.
Profit
Total revenue minus total cost.
Economic Profit
Total revenue minus total cost, including both explicit and implicit costs.
Accounting Profit
Total revenue minus total explicit cost.
Production Function
The relationship between the quantity of inputs used to produce a good and the quantity of output of that good.
Marginal Product
The increase in output that arises from an additional unit of input.
Marginal Product of Labor
The increase in output resulting from employing one more unit of labor.
Diminishing Marginal Product
The property whereby the marginal product of an input declines as the quantity of the input increases.
Value of Marginal Product
The marginal product of an input multiplied by the price of the output.
Total Cost (TC)
The market value of all the inputs a firm uses in production.
Explicit Costs
Input costs that require a direct outlay of money by the firm.
Implicit Costs
Input costs that do not require an outlay of money by the firm (e.g., opportunity cost of the owner’s time).
Opportunity Cost
Whatever must be given up to obtain some item.
Fixed Costs (FC)
Costs that do not vary with the quantity of output produced.
Variable Costs (VC)
Costs that vary with the quantity of output produced.
Average Total Cost (ATC)
Total cost divided by the quantity of output (ATC = TC / Q). Note: TC = FC + VC.
Average Fixed Cost (AFC)
Fixed costs divided by the quantity of output (AFC = FC / Q).
Average Variable Cost (AVC)
Variable costs divided by the quantity of output (AVC = VC / Q).
Marginal Cost (MC)
The increase in total cost that arises from an extra unit of production (MC = ΔTC / ΔQ).
Budget Surplus
An excess of government revenue over government spending.
Budget Deficit
A shortfall of government revenue compared to government spending.
Efficient Scale
The quantity of output that minimizes average total cost.
Cost (Seller’s Perspective)
The value of everything a seller must give up to produce a good.
Factor Markets
Markets where the factors of production (e.g., labor, land, capital) are traded, distributing the economy’s income.
Economies of Scale
The property whereby long-run average total cost falls as the quantity of output increases.
Diseconomies of Scale
The property whereby long-run average total cost rises as the quantity of output increases.
Constant Returns to Scale
The property whereby long-run average total cost stays the same as the quantity of output changes.
Absolute Advantage
The comparison among producers of a good based on their productivity.
Comparative Advantage
The comparison among producers of a good based on their opportunity cost.
Imports
Goods produced abroad and sold domestically.
Exports
Goods produced domestically and sold abroad.