AP Macro Unit 2

% Change in GDP

How to Measure growth from year to year

Disposable Income

Equal to income plus government transfers minus taxes, is the total amount of household income available to spend on consumption and to save

Intermediate Goods, Non-Production Transactions (stocks), Non-market Activities (babysitting), Used Goods

What is not included in GDP

Final goods and services

Goods and services sold to the final, or end, user

GDP

The total value of all final goods and services produced in the economy during a given year.

Intermediate Goods

Goods made in final goods

Expediture Approach, Income Approach, and Value Added Approach

3 ways to Calculating GDP

Inflation rate

The percentage increase in the overall level of prices per year CPI= price level

Intermediate goods and services

Goods and services bought from one firm by another firm to be used as inputs into the production of final goods and services

Labor force

The people who are currently working and the people who are currently looking for work

Expediture Approach

C + I + G + (X - M)

rent+ wages + interest + profit

Income Approach

Market Basket

A hypothetical set of consumer purchases of goods and services used to measure changes in overall price.

Real wage and income

Real wage: Wage rate divided by the price level to adjust for the effects of inflation or deflation

Profit

Also called factor payments, money businesses earn after paying all of their costs

At least 16 years old, able and willing, not institutionalized, nor in the military, school full-time, or retired

Labor Force Requirements

Unemployment

People who are actively looking for work but aren't currently employed

Real GDP

The total value of all final goods and services produced in the economy during a given year, calculated using the prices of a selected base year in order to remove the effects of price changes.

Circular Flow model

illustrates the flow of resources, goods and services, and money between households and firms within an economy

N, the U.S. had no part in producing this product

Is part of U.S. GDP? You purchase a cookbook on a recent vacation to Mexico.

Yes, Consumer Spending

Canadian tourists buy lunch at a restaurant while visiting San Antonio

Yes, Consumer Spending

Is part of GDP? You enroll in an online defensive driving course to have a ticket dismissed.

10%

If the labor force is 500,000 people and the number of employed is 450,000, what is the unemployment rate?

Households

Who demands goods and services in the product market?

Households

Who supplies resources in a market economy?

What is a firm's goal in a market economy?

To make money by producing goods and services

-To maximize profit

Capital, land, labor, and entrepreneurship

What are the four factors of production?

If inflation is higher than expected who benefits, borrowers or lenders?

Borrowers because they repay their loans with funds that have a lower real value than had been expected

What is CPI and what is it used to measure?

CPI (Consumer Price Index) is the most widely used measure of the overall price level in the U.S. It measures the cost of the market basket of a typical urban American family

4%

You get a 10% raise, the inflation rate is 6%, how much did you income increase?

What are the three causes of inflation?

Money supply increase (govt. prints too much currency), demand pull, cost push

What is frictional unemployment?

Unemployment due to the time workers spend in the job search, switching to a new job, or seasonal unemployment

What is structural unemployment?

Unemployment that results when workers lack the skills required for the available jobs, or a job was rendered obsolete

What is cyclical unemployment?

The deviation of the actual wage rate of unemployment from the natural rate. It is the share of unemployment that arises from the business cycle.

Underemployment is?

Workers who would like to work more hours or who are overqualified for their jobs. It is the number of people who work part-time because they cannot find full-time​ jobs.

Discouraged Workers

Workers that are able to work, but have given up in finding a job. Not included in the labor force

Discouraged workers or workers seeking better jobs are not included

Why is the unemployment rate understating the true unemployment?

Business Cycle

Shows the peak and trough of an economy while depicting employment and relationship to PPC

Lenders, fixed income, savers

Those hurt by inflation

Borrowers, business where are price of product increases before a price of an input

Those benefiting from inflation

Subsitution Bias, New products, Product Quality

Issues with CPI

Subsitution Bias

If price increases, people may buy more of a subsitute than the original

Economic System, Rule of Law, Captial Stock, Human Captial, Natural Resources

5 indicators of Standard of Living

Price Indices

Index Numbers Assigned to each year that shows how prices have changed relative to specific base year

Deflation

decrease in prices

disinflation

slow increase in prices

recession

6 months of economic downturn

Full Employment (5%)

No cyclical unemployment, just NRU

Natural Rate of Unemployment

Combination of frictional and structural unemployment

Durable Goods

Goods that last at least 3 years (washing machines)

Non-durable goods

goods that are consumed quickly (food)

Private Sector

Part of the economy that is run by individuals and businesses

Public Sector

Part of the economy that is controlled by the gov.

Promote Economic Growth, Limit Unemployment, Keep Prices Stable

3 Economic Goals