AP Macro Unit Two

Gross Domestic Product

The dollar value of all final goods and services produced within a country in one year

What is not included in the GDP?

Intermediate goods, non production transactions, non market and illegal activities

GDP Per Capita

GDP/Population - better measure of a nation’s standard of living

Give five reason why some countries have higher GDPs

Economic systems, rule of law, capital stock, human capital, and natural resources

Expenditures Approach

Add up all the spending on final goods and services produced in a given year. Includes consumer spending, business investments, government spending, and net exports.

Income Approach

Add up all the income earned from selling all final goods and services produced in a given year. This includes labor income, rental income, interest income, and profit.

Value-Added Approach

Add up the dollar value added at each stage og the production process

Factor Payments

Payment for the factors of production, namely rent, wages, interest, and profit

Components of Consumer Spending

Durable goods, non-durable goods, and services

When is Inventory Counted for GDP?

The year it was produced, not sold

Formula for percent change

(final - initial) / initial

Limitations of GDP

Doesn’t count money spent on bad things, doesn’t count non production societal goods such as volunteering, or non market transactions

Unemployment

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

Unemployment Rate

Percent of people in the labor force who want a job but are not working

Who is considered in the labor force?

At least 16; not in the military, retired, or in school full time; not institutionalized; able and willing to work

Friction Unemployment

Temporary unemployment between jobs

Seasonal Unemployment

A type of frictional unemployment, which is due to time of year and nature of the job

Structural Unemployment

Changed in the labor force that make some skills obsolete

Creative Destruction

The permanent loss of jobs as a result of some skills becoming obsolete

Technological Unemployment

Type of structural unemployment where automation and machinery replace workers

Cyclical Unemployment

Unemployment caused by a recession; demand for goods fall and workers are laid off

Natural Rate of Unemployment

Friction + structural. Should be around 4-6%

Problem with low unemployment?

Prices rise since consumers spend more and producers bid up price of resources

Criticisms of the Unemployment Rate

Discouraged workers aren’t counted, labor force participation rate excluded, underemployed workers are considered equally employed, and it doesn’t show disparity for minorities and teenagers

Why is high inflation bad?

banks don’t land and people don’t save which decreases investment and the GDP

Deflation

Decrease in general prices or a negative inflation rate; causes hoarding of resources

Disinflation

Prices increasing at slower rates

Inflation Rate

(final year - first year) / first year

Price Indices

Index numbers assigned each year that show how prices have changed relative to a specific base year

Consumer Price Index

(Price of market basket / price of market basket in base year) x 100

Problems with the Consumer Price Index

Substitution Bias: As prices increase for the fixed market basket, consumers buy less of these products and more substitutes that may not be part of the basket

New Product: May not include newest products

product Quality: Ignores both improvements and decline in product quality

Who is hurt by inflation?

Lenders, savers, people with fixed incomes

Who is helped by inflation?

Borrowers,

Nominal

Measured in dollars

Real

Adjusted for inflation

Costs of Inflation

Menu Costs: Costs money to change listed prices

Shoe Leather Costs: The costs of transactions increase

Unit of Account Cost: Money doesn’t reliably measure the value of goods/services

GDP Deflator

(Nominal GDP / Real GDP) x 100

Business Cycle

How long until a recession is official?

Six months

Real ____ Rate

Nominal ____ - Inflation rate

*Works for wage, interest, and any value rate!!