AP Macro Unit 2

National income accounting

A system that measures a country's economic performance by tracking the income generated and distributed across its economy.

GDP

Gross Domestic Product; the total value of all final goods and services produced within a country's borders in a specific time period.

Factors of Production

Resources used in the production of goods and services, typically classified into four categories: land, labor, capital, and entrepreneurship.

Intermediate goods

Products that are used as inputs in the production of other goods and services.

Final goods

Products that are completed and sold to consumers without any further processing.

Multiple counting

Including the value of intermediate goods in GDP calculations, leading to inflation of the economic measure.

Value added

The increase in worth of a product that occurs at each stage of production, calculated as sales revenue minus the cost of inputs.

Expenditures approach

A method of calculating GDP by adding up all expenditures made in the economy, including consumption, investment, government spending, and net exports.

Income approach

A method of calculating GDP by summing all the incomes earned in the production of goods and services.

Value Added Approach

Assessing GDP by summing the value added at each production stage.

Personal consumption expenditures (C)

The total value of all goods and services consumed by households.

Government purchase (G)

Expenditures by the government on goods and services that do not include transfer payments.

Net exports (Nx)

The value of a country's total exports minus its total imports.

Gross private domestic investment (I)

The total amount of investment by businesses in the domestic economy.

Net private domestic investment

Gross private domestic investment minus depreciation.

Indirect business taxes

Taxes that businesses pass on to consumers, such as sales tax.

Consumption of fixed capital

The value of the depreciation of fixed assets that occurs over time.

Personal income (PI)

The total income received by individuals before taxes.

Disposable income (DI)

The amount of money households have available for spending and saving after income taxes.

Nominal GDP

GDP measured at current market prices without adjustment for inflation.

Real GDP

GDP adjusted for inflation, representing the true value of goods and services.

Price index

A measure that examines the weighted average of prices of a basket of consumer goods and services, used to assess inflation.

Economic growth

An increase in the production of goods and services in an economy over a period of time.

Recession

A period of temporary economic decline during which trade and industrial activity are reduced.

Expansion

A phase of the business cycle characterized by increasing economic activity and growth.

Peak

The highest point of economic activity in the business cycle before a downturn.

Contraction

A decline in national output, signaling a fall in economic activity.

Trough

The lowest point in the business cycle, indicating the end of a recession.

Recovery

A phase after a recession where the economy starts to grow again.

Depression

A prolonged period of economic downturn characterized by a significant decline in economic activity.

Output Gap

The difference between the actual output of an economy and its potential output.

Actual Output

The real output produced in an economy during a specific period.

Potential Output

The maximum possible output an economy can achieve when operating at full efficiency.

Circular Flow Model

A visual representation of the economy that shows how money flows through markets among households and firms.

GNI

Gross National Income; the total income earned by a nation’s residents and businesses, including any income earned abroad.

Real GDP per capita

Real GDP divided by the population of a country, indicating the average economic output per person.

Business cycle

The fluctuations in economic activity that an economy experiences over a period.

Labor force

The total number of people available for work, including those who are employed and those who are unemployed.

Unemployment rate

The percentage of the labor force that is unemployed and actively seeking employment.

Discouraged workers

Individuals who have stopped looking for work due to a belief that no jobs are available.

Seasonal Employment/unemployment

Joblessness occurring at certain times of the year when demand for labor is lower.

Frictional unemployment

Short-term unemployment that occurs while people are transitioning from one job to another.

Structural unemployment

Long-term unemployment occurring when there is a mismatch between the skills of the workforce and the needs of employers.

Cyclical unemployment

Unemployment that results from economic downturns or recessions.

Full-employment rate

The lowest level of unemployment that can exist in an economy without causing inflation.

Natural rate of unemployment

The long-term rate of unemployment determined by structural factors in the economy.

GDP gap Okun’s law

The law that suggests a relationship between unemployment and GDP, where higher unemployment leads to lower GDP.

Inflation

The rate at which the general level of prices for goods and services rises, eroding purchasing power.

Consumer price Index (CPI)

An index that measures changes in the price level of a market basket of consumer goods and services.

Anticipated inflation

Inflation that individuals expect and plan for in their financial decisions.

Unanticipated inflation

Inflation that comes as a surprise to both consumers and businesses.

Inflation Rate

The percentage increase in the general price level over a specific period.

Cost of living adjustments (COLAs)

Increases in wages or benefits to counteract the effects of inflation.

Real interest rate

The interest rate that has been adjusted for inflation, representing the true cost of borrowing.

Nominal interest rate

The interest rate before adjustment for inflation.

Deflation

A decrease in the general price level of goods and services.

Disinflation

The slowing down of inflation, resulting in a decrease in the rate of inflation over time.

Demand-Pull Inflation

Inflation that occurs when demand for goods and services exceeds supply.

Aggregate Supply

The total supply of goods and services that firms in an economy plan to sell during a specific time period.

Cost Push Inflation

Inflation caused by an increase in the cost of production that leads to a decrease in aggregate supply.

Inflationary Spiral

A situation where rising prices lead to higher wage demands, which in turn lead to higher production costs and further price increases.