AP MACROECONOMICS - Unit 2 Vocab

Gross Domestic Product (GDP)

The total value of all final goods and services produced in a country in a given year.

GDP per Capita

The GDP of a country divided by its population.

Expenditure Approach

Way of calculating GDP by adding up all the spending on final goods and services produced in a given year.

Formula for Expenditure Approach

C + I + G+ (X-IM) = GDP

Income Approach

Way of calculating GDP by adding up all income that resulted from selling all final goods and services produced in a given year.

Formula for Income Approach

W + R + I + P + Sa = GDP

Formula for Measuring Change in Growth

% Change in GDP = (Year 2 - Year 1)/Year 1 × 100

Formula for Nominal to Real GDP

Real GDP = (Nominal GDP/GDP Deflator) × 100

Formula for Real GDP per Capita

Real GDP/Population

Unemployment

Workers that are actively looking for a job but aren’t working.

Labor Force

The sum of people (16 year olds and older) who have jobs and people who do not have jobs.

Formula for Participation Rate

(Labor Force/Labor Force Population) × 100

Formula for Unemployment Rate

(Unemployed/Labor Force) × 100

Frictional Unemployment

When workers quit a job, got fired, or are actively seeking for something better.

Seasonal Unemployment

A type of frictional unemployment due to time of year and nature of the job. (Ex: lifeguards are typically not needed in the winter).

Structural Unemployment

When changes in the labor force make some skills obsolete (ex: coal miners losing their jobs due to a coal mine shutting down)

Creative Destruction

The process where new innovations and technologies replace outdated ones, leading to the downfall of old industries and the creation of new ones (permanent loss of jobs).

Cyclical Unemployment

Type of unemployment caused from a recession and is necessary to control (Ex: The Great Depression).

Natural Rate/Non-Cyclical Rate of Unemployment

Frictional plus structural unemployment; it’s the amount of unemployment that exists when the economy is healthy and growing.

Full Employment Output

The maximum level of goods and services an economy can produce (Real GDP) when all available resources are fully and efficiently utilized, resulting in a situation with only frictional and structural unemployment, not cyclical unemployment.

Formula for Actual Unemployment

Natural Unemployment + Cyclical Unemployment

Discouraged Workers

People who gave up looking for a job

Underemployed Workers

People who want more hours but can’t get them; they are still considered employed.

Inflation

The rising general level of prices and it reduces the “purchasing power” of money.

Consumer Price Index (CPI)

Bureau of Labor Statistics (BLS) measures prices of a fixed market basket of 300 goods and services.

Substitution Bias

A price increase in one thing leads to the substitution of a lower priced product.

Quality Bias

Over time, technological advances increase the life and usefulness of products.

New Product Bias

New products are not introduced into the CPI until the become commonplace, so dramatic price decreases with new technology end up being not reflected.

Formula for CPI

(Price of Market Basket/Price of Market Basket in Base Year) x 100

Formula for Inflation Rate

((CPI Current Year - CPI Previous Year)/CPI Previous Year) x 100

Formula for GDP Deflator

(Nominal GDP/Real GDP) x 100

Formula for Economic Growth

((Real GDP_Current - Real GDP_Previous)/Real GDP_Previous) x 100

Deflation

Decrease in general prices or a negative inflation rate.

Disinflation

Decrease in the rate of inflation.

Shoe-Leather Cost

The economic inefficiencies that arise when inflation causes individuals to reduce their cash holdings and increase their transactions in search of better value for their money.

Menu-Cost

Cost of changing the prices in stores.

Unit-of-Account

Makes money a less reliable source of currency.

Anticipated Inflation

The expected inflation by participants in an economy.

Fixed Interest Rates

An interest rate that stays the same over the life of a loan or the term of an investment; used when market-interest rates are low or you anticipated the inflation rate to rise.

Variable Interest Rates

An interest rate that can change over the life of a loan or the term of an investment; used when market-interest rates are high or you anticipated the inflation rate to fall.

Nominal Wage

Wage measured by dollars rather than purchasing power.

Real Wage

Wage adjusted for inflation.

Nominal Interest Rates

The normal interest rate lenders charge you on your statements.

Real Interest Rates

The nominal interest rate adjusted for inflation

Formula for Real Interest

Nominal Interest - Inflation

Demand-Pull Inflation

Occurs when the demand for goods and services in an economy grows faster than the economy's ability to produce them, leading to higher prices.

Cost-Push Inflation

Occurs when businesses increase prices in response to rising production costs.

The Product Market

The “place” where goods and services produced by businesses are sold to households.

The Resource (Factor) Market

The “place” where resources (land, labor, capital, and entrepreneurship) are sold to businesses.

Private Sector

Part of economy that’s run by individuals and businesses.

Public Sector

Part of economy that’s controlled by the government.

Factor Payments

Payments for the factors of production.

Transfer Payments

When the government redistributes income (welfare, social security)

Market

Location/mechanism that allows buyers and sellers to exchange a specific product

Recession

A 6 month period decline in real GDP.