Key Terms

Please review the following key terms. (6)

Business cycle

The relatively short-term movement of the economy in and out of recession.

Convergence

Pattern in which economies with low per capita incomes grow faster than economies with high per capita incomes.

Depreciation

The process by which capital ages over time and therefore loses its value.

Double counting

A potential mistake to be avoided in measuring GDP, in which output is counted more than once as it travels through the stages of production.

Economic freedom

A condition in which people are able to make personal choices, their private property is protected, and they are free to buy and sell in markets.

GDP per capita

GDP divided by the population.

Gross domestic product (GDP)

The value of the output of all goods and services produced within a country in a year.

Gross national product (GNP)

Includes what is produced domestically and what is produced by domestic labor and business abroad in a year.

Law of diminishing returns

If the quantity of capital is small, an increase in capital brings a large increase in production and vice versa.

National income

Includes all income earned: wages, profits, rent, and profit income.

Nominal value

The economic statistic actually announced at that time, not adjusted for inflation; contrast with real value.

Peak

During the business cycle, the highest point of output before a recession begins.

Real value

An economic statistic after it has been adjusted for inflation; contrast with nominal value.

Recession

A significant decline in national output.

Standard of living

All elements that affect people’s happiness, whether these elements are bought and sold in the market or not.

Trough

During the business cycle, the lowest point of output in a recession, before a recovery begins. (1)