ap macro sum 1 prep

PPC

simple economic model that shows the possible combination of two different goods that can be produced or services that can be provided assuming full employment and an efficient use of available economic resources]

Concave PPC (Curved Out)

Opportunity Cost increasing

Convex PPC (Curved In)

Opportunity Cost decreasing

Linear PPC

Opportunity Cost constant

Points beyond PPC

infeasible level of production with current resources. Any combination produced that is outside of the PPC is not sustainable.

Points inside PPC

combination produced that reflects an inefficient use of resources and/or a product of unemployment. This is true for any point beneath the PPC

Shifting PPC

Shifts left (when economic resources/employment decrease) and right (economic resources/employment increase)

Economic Resources

resources that are needed to produce goods and provide services. These resources include capital, labor, land, and technology/entrepreneurship. Scare or limited in availability.

Opportunity Cost

measures what you chose relative to what you gave up to make that choice or the value of the next best alternative

Comparative Advantage

if it has a lower opportunity cost to produce a particular good compared to a rival. The value of what you've given up based on your given choice.

Absolute Advantage

Assuming that the countries in question are using the same number of resources, a country has this when it produces more of a particular good or service than its rival. This can easily be seen by comparing the x and y intercepts of the PPC.

Mutually beneficial trade

Comparative advantage and opportunity costs determine the terms of trade for exchange. Trade only occurs if it is mutually beneficial to both parties. Compare the bounds of each producer with opportunity costs to ensure mutual benefit.

Law of Demand

as prices increase, the quantity of goods or services demanded decreases and vice (negative relationship)

Determinants of Demand

Changes in Price of Related Goods (Substitute and Complimentary), Changes in Population, Price Expectations, Income, Consumer Preferences

Law of Supply

as price increases, the quantity of goods or services supplied increases and vice versa (positive relationship)

Determinants of Supply

Price of Inputs (costs), Price of Related Goods, Number of Suppliers, Technological Innovation/Increased Efficiency, Expected Future Prices

Market Equilibrium

When the quantity of a good or service demanded is equal to the quantity of a good or service supplied at a given price point, the market is balanced. Intersection of quantity of supply and demand with respect to price.

market shortage

quantity demanded is higher than the quantity supplied at a given price point. located under the equilibrium point.

market surplus

quantity supplied exceeds the quantity demanded at a given price point. located above the equilibrium point.

Key characteristic of free market economic systems

When the market experiences disequilibrium prices, shortages and surpluses, market forces drive prices toward equilibrium

Business Cycle

fluctuations that occur over time in aggregate output, or the total amount of output produced by an economy, and employment due to changes in aggregate supply and/or aggregate demand. Four Phases

Positive Output Gap

economy is producing at a level beyond its potential at full-employment. This would be the equivalent of the economy briefly producing beyond the production possibilities curve, which we've seen is unsustainable and is followed by economic contraction.

Negative Output Gap

economy is producing below its potential at full-employment. This would be reflected by a point within the production possibilities curve.

GDP

GDP is the measure of the final output of the economy within a country in a given period.

Nominal GDP

value of all final goods and services produced within a country in a year based on current market prices (doenst account for inflation, uses current market prices). the aggregate output

Circular Flow Model

households provide firms, or businesses, the factors of production necessary to make goods and services. In exchange, firms provide households rent, wages, interest, and profits. Once the goods and services are produced, they are supplied to households in exchange for payment, or sales, of those goods and services. Using this model allows us to represent out modern, capitalist economies function.

Three approaches for calculating GDP

Expenditure, income, value-added.

C + I + G (EX-IM)

GDP calculation (expenditures approach)

Limitations of GPD

doesn't account illegal/black market transactions, income inequality.

Labor Force

individuals who are currently working along with individuals who are not working but looking for a job, and who is not in the labor force

people in the labor force / people in the population X 100

labor force participation rate

Employed

People in the labor force that have a paying job

Unemployed

People that are not in a paying job, available for work, and actively looking for work (in the past 4 weeks)

unemployed people/# of people in the labor force X 100

unemployment rate

Limitations of Unemployment

often criticized for understating the level of joblessness because it excludes groups such as discouraged workers and part-time workers

Frictional unemployment

when someone experiences an employment transition or the period of time between when a person has lost one job and been hired for a new job

Structural unemployment

mismatch between the skills that workers have and the skills that workers need (affected by tech, competition, and government)

Cyclical unemployment

occurs due to changes in the business cycle, such as economic recessions

natural rate of unemployment / full employment

combines those who are structurally and frictionally unemployed, in other words, it reflects the lowest unemployment (or highest employment) we can reasonably expect in an economy

Inflation

broad increase in prices across an economy over a period of time, purchasing power for both producers and consumers decreases

Inflation rate

percentage of price increase over time that diminishes wage increases or rates of return

real variables

like wages, interest rates, and GDP, are adjusted to take increased prices into consideration

Deflation

broad decrease in the prices of goods and services across an economy over a period of time, which increases the purchasing power for both producers and consumers. may sound like a good thing, deflation is often an indicator of an economic downturn, signaling a recession or a depression

Deinflation

temporary decrease in the rate of inflation

Cost of Basket Current Year / Cost of Basket in Base Year X 100

Consumer Price Index (CPI), CPI is a whole number

Current Year CPI - Previous Year CPI / Previous Year CPI X 100

Rate of Inflation with CPI

Substitution Bias

the likelihood that consumers will opt to purchase less expensive substitute goods and services when prices increase. Causes CPI to overstate the true inflation rate.

Real GDP

measuring how much is produced in a given year by using constant prices which removes the effect on GDP due to changes in overall price level

Nominal GDP / Real GDP X 100

GDP Deflator

(GDP Deflator (Year 2) - GDP Deflator (Year 1)) / GDP Deflator (Year 1) * 100

Inflation Rate (GDP Deflator)

GDP Deflator vs CPI

CPI focuses on tracking inflation on consumer spending while the GDP deflator more broadly tracks inflation for all the components of GDP