AP Macro Unit 2 Test Study

Gross Domestic Product (GDP)

total market value of all final goods & services produced in a country in one year.

Nominal GDP

GDP measured in current prices (not adjusted for inflation).

Real GDP

GDP adjusted for inflation (shows actual output).

GDP Deflator

price index measuring inflation (Nominal ÷ Real × 100).

Consumer Price Index (CPI)

measures average change in prices of a fixed basket of goods.

Inflation

rise in general price level over time.

Deflation

fall in general price level.

Disinflation

inflation is slowing down, but still positive.

Unemployment Rate

% of labor force unemployed but actively seeking work.

Labor Force

employed + unemployed (actively looking).

Labor Force Participation Rate

(Labor Force ÷ Adult Population) × 100.

Frictional

short-term, between jobs.

Structural

skills don’t match jobs.

Cyclical

caused by recessions.

Seasonal

changes with seasons. (lifeguard)

Business Cycle

natural fluctuation of economic activity around its long-term growth trend.

GDP (Expenditure Approach):

GDP=C+I+G+(X−M)

GDP Deflator:

Deflator=Real GDP/Nominal GDP​ × 100

Unemployment Rate:

Unemployment Rate=Unemployed/Labor force x 100

Business Cycle Graph

expansion, peak, contraction, trough.

CPI Basket Example

shows how CPI is calculated using base year vs current year.

GDP Growth Curve

Nominal vs Real GDP.

Intermediate goods……

are NOT included in GDP (only final goods).

Used goods….

don’t count in GDP (already counted before).

Stocks/bonds….

don’t count in GDP (just ownership transfer).

If inflation is higher than expected….

borrowers gain, lenders lose.

Discouraged workers….

are NOT counted in unemployment rate (they’re out of labor force).

Real GDP…

is best for comparing living standards across years.

CPI is…

Only consumers, fixed basket.

GDP Deflator is…

all goods/services, flexible basket.