AP MACRO Unit 2 Review

GDP

GDP

Value of all final goods & services produced within a country in a year

C + I + G + Xn

Expenditures Approach: Consumer spending, investment spending, government spending, and net exports

W + R + I + PR

Income Approach: Labor income (wages), rental income, interest income, profit

What things are NOT included in GDP?

Intermediate goods, nonproduction transactions, and illegal production

Intermediate good

A part or factor that’s used to produce a final good

What are the factors for being in the LABOR FORCE?

• Being at least 16

• Able and willing to work

• Not institutionalized (prisons, hospitals)

• Not in the military, school full-time, or retired

Unemployed

Someone who is actively looking for a job but isn’t working

Discouraged Workers

People who are no longer looking for a job because they’ve given up

Underemployed Workers

Part-time workers that wants more hours but can’t, still considered employed.

What are the 3 types of unemployment

Structural, Frictional, and Cyclical

Frictional Unemployment

Temporary unemployment or being between jobs. Qualified workers with transferable skills.

Structural Unemployment

Unemployment due to changes in the labor force that make some skills obsolete

Cyclical Unemployment

Unemployment directly caused by a recession

Natural Rate of Unemployment

Unemployment rate in an economy that’s doing great

What’s included in the Natural Rate of Unemployment?

Frictional + structural unemployment

Consumer Price Index

A measure of the prices paid by consumers for a market basket of consumer goods in a year

Inflation

Increase in general price over time

Deflation

Decrease in general prices or a negative inflation rate

Disinflation

Prices increasing at slower rates

GDP Deflator

Measures the change in prices for all goods & services produced

Substitution Bias

When a good gets expensive in a fixed market basket, consumers with substitute it with a cheaper option. The expensive good will still be reflected in the CPI and will overstate both CPI and inflation

What does the INTRODUCTION OF A NEW GOOD do to CPI?

Introducing a new good won’t reflect in a fixed market basket. New products will make the dollar more valuable.

What does product quality do to CPI?

Increases in product quality will give people more purchasing power, but this won’t be reflected in CPI.

Who is hurt by inflation?

Lenders at fixed interest rates, people with fixed incomes, and savers

Who is helped by inflation?

Borrowers and a business where the price of a product increases faster than the price of resources

Nominal Wage

Wage not measured for inflation

Real Wage

Wage adjusted for inflation, shows purchasing power

Nominal GDP

GPD measured in current prices (not adjusted for inflation)

Real GDP

GDP measured in constant dollars (adjusted for inflation)

What are the 4 phases to The Business Cycle

Peak, Recession, Trough, Expansion

Positive Output Gap

The economy is moving faster than full employment in the business cycle

Negative Output Gap (Recessionary Gap)

The economy is moving slower than full employment in the business cycle

Transfer Payments

A payment of money where there is no good or service involved. Ex: social security checks, unemployment benefits

What are some limitations to GDP?

Does not include leisure time, housework, or volunteerism

Marginally Attached Workers

Would like to be employed & have looked for a job in the recent past but have stopped looking

U3

The official unemployment rate reported to the media

U6

The broadest measure of unemployment. Includes discouraged workers, marginally attached workers, and underemployed workers

Market Basket

A selection of goods and services purchased

Nominal

Not adjusted for inflation

Real

adjusted for inflation, purchasing power

What are the two measures for The Business Cycle

Output and time