AP Macroeconomics Unit 2 Study Notes: Measuring the Economy with Unemployment, Inflation, and Cycles

Unemployment

People who want to work and are actively looking for a job but cannot find one.

Working-age (adult) population

People old enough to be considered potential workers (age cutoff is a measurement convention).

Labor force

All people who are either employed or unemployed.

Unemployed

People without a job who are available to work and have actively searched for work recently.

Not in the labor force

People not working and not actively searching for work (e.g., some students, retirees, stay-at-home caregivers, discouraged workers).

Unemployment rate

Percent of the labor force that is unemployed: (Unemployed ÷ Labor force) × 100.

Labor force participation rate (LFPR)

Percent of the adult population in the labor force: (Labor force ÷ Adult population) × 100.

Frictional unemployment

Unemployment from normal job search and matching (entering the workforce, changing jobs, moving, searching for a good fit).

Structural unemployment

Unemployment caused by a mismatch between workers’ skills/locations and available jobs; often longer-lasting and may require retraining or moving.

Cyclical unemployment

Unemployment that rises during downturns in the business cycle when spending and production fall and firms lay off workers.

Natural rate of unemployment

The unemployment rate that exists at full employment; mainly frictional + structural unemployment (excludes cyclical unemployment).

Full employment

The economy operating near potential output with unemployment at the natural rate (not zero unemployment).

Underemployment

Workers counted as employed but not fully utilized (e.g., wanting full-time work but only able to find part-time work).

Discouraged workers

People who want a job but stop searching; not counted as unemployed because they are not actively searching (classified as not in the labor force).

Inflation

A sustained increase in the overall price level, reducing purchasing power (each dollar buys fewer goods and services).

Price index

A measure tracking the price of a typical basket of goods/services over time: (Cost of basket in current year ÷ Cost in base year) × 100.

Base year

The reference year for a price index, set equal to 100.

Consumer Price Index (CPI)

A price index measuring the cost of a typical market basket of goods and services purchased by households; often used as a cost-of-living indicator.

GDP deflator

A price index for all final goods and services produced domestically; includes investment and government purchases and excludes imports.

Inflation rate

Percent change in a price index from one period to the next: [(Indext − Index{t−1}) ÷ Index_{t−1}] × 100.

Deflation

A sustained decrease in the overall price level (negative inflation).

Disinflation

Inflation is still positive, but the inflation rate is falling (e.g., from 6% to 3%).

Menu costs

Resource costs to firms of changing prices frequently (updating menus, systems, labels, and communicating new prices).

Shoe-leather costs

Time and effort people spend managing cash holdings when inflation is high (e.g., making more frequent bank trips or shifting money to protect purchasing power).

Potential output

The level of real GDP the economy can sustain when resources are used normally, consistent with the natural rate of unemployment.