AP Macroeconomics Unit 2

(2.1) Circular Flow Diagram

(2.1) Define Gross Domestic Product (GDP)?

Total market value of all final goods and services produced within a country in one year

(2.1) Diagram of the Expanded Money Flow Diagram

(2.1) How can GDP be measured?

1. Value of production of final goods and services

2. Factor income earned by households from firms in that economy

3. Value of spending on domestically produced final goods and services (Aggregate Spending Model or Expenditure approach) (AP Macro will mostly consider this)

(2.1) What is not included in GDP?

Second hand sales, purely financial transactions, service provided for no money, intermediate goods/services and foreignly produced goods/services

(2.1) What is the formula for GDP?

(2.2) What are some limitations of GDP?

Fails to account for non-market transactions and doesn’t address fully the standard of living (air, health)

(2.3) 3 types of unemployment?

Frictional - Job search, desirable skills

Structural - No desirable skills

Cyclical - Caused by recession

(2.3) Formula for the Natural Rate of Employment?

Natural Rate of Employment = Frictional Unemployment + Structural Unemployment

(2.3) Labor Force Formula

Labor Force = Employed (Has job part or full time) + Unemployed (Not employed but are actively looking for work)

(2.3) Unemployment Rate Formula?

(2.4) CPI Formula?

(2.4) Define Consumer Price Index (CPI)

A measure of the average change over time in the prices paid by consumers for FIXED "market basket" of goods and services

(2.4) Rate of Change Formula?

(2.4) Real Value Formula?

(2.4) Shortcomings of the CPI?

May overstate the inflation rate due to substitution bias, introduction of new goods, unmeasured quality changes

(2.4) What do nominal values mean?

Economists use the term "nominal" when referring to variables that have NOT been adjusted for inflation.