Economists use two frameworks to analyze macroeconomic problems. The long-run growth framework focuses on supply, while the short-run business-cycle framework focuses on demand.
Growth is measured by the change in real gross domestic product (real GDP) and by the change in per capita real GDP. Per capita real GDP is real GDP divided by the total population.
The secular trend growth rate of the economy is 2.5 to 3.5 percent. Fluctuations of real output around the secular trend growth rate are called business cycles.
Phases of the business cycle include peak, trough, upturn, and downturn.
Unemployment is calculated as the number of unemployed individuals divided by the labor force. Unemployment rises during a recession and falls during an expansion.
The target rate of unemployment is the lowest sustainable rate of unemployment possible under existing institutions. It's associated with an economy's potential output. The lower the target rate of unemployment, the higher an economy's potential output.
The microeconomic approach to unemployment subdivides unemployment into categories and looks at those individual components.
A real concept is a nominal concept adjusted for inflation. Real output equals nominal output divided by the price index.
Inflation is a continual rise in the price level. The CPI, the PPI, and the GDP deflator are all price indexes used to measure inflation.
The GDP deflator is the broadest price index. It measures inflation of all goods produced in an economy. The CPI measures inflation faced by consumers. The PPI measures inflation faced by producers.
Expectations of inflation can provide pressure for an inflation to continue even when other causes don't exist.
Inflation redistributes income from people who do not raise their prices to people who do raise their prices. Inflation also reduces the information that prices convey.
