AP Macro Unit Two

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Gross Domestic Product

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40 Terms

1

Gross Domestic Product

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

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2

What is not included in the GDP?

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

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3

GDP Per Capita

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

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4

Give five reason why some countries have higher GDPs

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

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5

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.

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6

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.

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7

Value-Added Approach

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

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8

Factor Payments

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

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9

Components of Consumer Spending

Durable goods, non-durable goods, and services

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10

When is Inventory Counted for GDP?

The year it was produced, not sold

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11

Formula for percent change

(final - initial) / initial

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12

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

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13

Unemployment

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

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14

Unemployment Rate

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

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15

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

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16

Friction Unemployment

Temporary unemployment between jobs

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17

Seasonal Unemployment

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

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18

Structural Unemployment

Changed in the labor force that make some skills obsolete

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19

Creative Destruction

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

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20

Technological Unemployment

Type of structural unemployment where automation and machinery replace workers

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21

Cyclical Unemployment

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

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22

Natural Rate of Unemployment

Friction + structural. Should be around 4-6%

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23

Problem with low unemployment?

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

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24

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

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25

Why is high inflation bad?

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

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26

Deflation

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

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27

Disinflation

Prices increasing at slower rates

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28

Inflation Rate

(final year - first year) / first year

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29

Price Indices

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

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30

Consumer Price Index

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

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31

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

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32

Who is hurt by inflation?

Lenders, savers, people with fixed incomes

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33

Who is helped by inflation?

Borrowers,

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34

Nominal

Measured in dollars

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35

Real

Adjusted for inflation

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36

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

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37

GDP Deflator

(Nominal GDP / Real GDP) x 100

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38

Business Cycle

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39

How long until a recession is official?

Six months

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40

Real ____ Rate

Nominal ____ - Inflation rate

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

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