AP MACRO UNIT 2

Circular Flow

Circular Flow

the pattern in which goods, services and resources flow in the marketplace

GDP

the total market value of all final NEW goods and services produced annually in an economy

Nominal GDP

GDP measured in current prices

Limitations of GDP

• Nonmarket Activities

• Underground Economy

• Negative externalities

• Quality of life

Labor Force

the total number of workers, including both the employed and the unemployed

Unemployment Rate

the percentage of the labor force that is unemployed

Labor Force Participation Rate

the percentage of the adult population that is in the labor force

Types of Unemployment

frictional structural cyclical

Frictional Unemployment

*A type of unemployment caused by workers voluntarily changing jobs and temporary layoffs *unemployed workers between jobs.

Structural Unemployment

*unemployment resulting from industrial reorganization, *typically caused by technological change

limitations of unemployment rate

does not give a good indication of how many people are discouraged(not looking for work) or underemployed.

Natural Rate of Unemployment

frictional plus structural unemployment *typically 5- 7%

Calculate Unemployment Rate

unemployed/labor force x 100

Calculate Labor Force

employed + unemployed

Calculate Labor Force Participation Rate

labor force/adult population x 100

CPI (Consumer Price Index)

a measure of the overall cost of the goods and services bought by a typical consumer

Inflation

A general increase in prices

Deflation

A situation in which prices are declining

Disinflation

a reduction in the rate of inflation

Real Variables

variables measured in physical units

Calculate Inflation Rate

CPI this year - CPI last year / CPI last year x 100

Limitations of CPI as a measure of inflation

*Does not factor in change in quality or substitutes

Calculate CPI

(cost of basket in current year/cost of basket in base year) x 100

Real GDP formula

Nominal GDP/GDP Deflator x 100

GDP formula

C+I+G+(X-M)

GDP deflator formula

Nominal GDP/Real GDP x 100

Not included in GDP

1. Intermediate goods

2. Household production

3. Non-market (illegal) activities

4. Used goods and services

Real GDP per capita

real GDP divided by the total population

circular flow leakages

1)Savings 2)Imports

Phases of the business cycle

expansion-> peak-> contraction-> trough->recovery

Business Cycle Graph

a period of macroeconomic expansion followed by a period of contraction

recessionary gap

when aggregate output is below potential output

inflationary gap

when aggregate output is above potential output