AP Macro Unit 2

Business Cycle

The short-run alternation between economic upturns (expansions) and downturns (recessions).

Recessions

A period of economic downturn when output and employment are falling.

Expansions

A period of economic upturn when output and employment are rising.

Depression

A deep and prolonged economic downturn.

Employment

The total number of people currently working for pay.

Unemployment

The total number of people who are actively looking for work but are not currently employed.

Labor Force

The sum of employed and unemployed workers in the economy.

Unemployment Rate

The percentage of the labor force that is unemployed.

Aggregate Output

The total quantity of goods and services produced in an economy during a given period.

Inflation

A rise in the overall level of prices in the economy.

Deflation

A fall in the overall level of prices in the economy.

Price Stability

When the overall price level is stable, with little inflation or deflation.

Economic Growth

An increase in the maximum amount of goods and services an economy can produce (an outward shift of the PPC).

National Accounts

A set of statistics that track the overall economic performance, such as GDP.

Household

A person or group that shares income and makes consumption decisions.

Firm

An organization that produces goods and services for sale.

Product Markets

Markets where goods and services are bought and sold.

Consumer Spending

Household spending on goods and services.

Factor Markets

Markets where productive resources (land, labor, capital, entrepreneurship) are bought and sold.

Government Spending

Total government expenditures on goods and services.

Taxes

Compulsory payments made by individuals and businesses to the government.

Tax Revenue

The income the government receives from taxes.

Disposable Income

Household income after taxes, available for spending or saving.

Government Transfers

Payments the government makes to individuals without expecting goods or services in return.

Private Savings

Household income not spent on consumption or taxes.

Financial Markets

Institutions where savers provide funds for investment spending by borrowers.

Government Borrowing

The amount of funds borrowed by the government in financial markets to cover budget deficits.

Investment Spending

Spending on new productive physical capital, such as machines, tools, or buildings.

Gross Domestic Product (GDP)

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

Expenditure Approach

Measuring GDP by adding up all spending on final goods and services.

Income Approach

Measuring GDP by adding up all incomes earned from producing goods and services.

Producer Price Index (PPI)

A measure of the average changes in prices received by producers of goods and services.

Value-Added Approach

Measuring GDP by summing the value added at each stage of production.

Intermediate Goods & Services

Goods and services bought for resale or use in producing other goods and services.

Final Goods & Services

Goods and services sold to their final user, not for resale or further processing.

Net Exports

Exports minus imports of goods and services.

Value Added

The value of a producer’s output minus the value of the inputs purchased from others.

Real GDP

GDP adjusted for inflation, measured in constant prices.

Nominal GDP

GDP measured in current prices, not adjusted for inflation.

GDP per Capita

Real GDP divided by the population; measures average output per person.

Labor Force Participation Rate

The percentage of the population aged 16+ that is in the labor force.

Discouraged Workers

People who want a job but have given up looking because they believe none are available.

Marginally Attached Workers

People who would like a job, have looked in the past, but are not currently looking.

Underemployed Workers

Workers who have part-time jobs but want full-time work or jobs that don’t use their skills.

Frictional Unemployment

Unemployment due to the time workers spend searching for a job.

Structural Unemployment

Unemployment caused by a mismatch between workers’ skills and the skills needed for available jobs.

Cyclical Unemployment

Unemployment caused by downturns in the business cycle.

Efficiency Wages

Wages set above equilibrium to encourage higher worker productivity.

Natural Rate of Unemployment

The unemployment rate that arises from frictional and structural unemployment, even when the economy is at full employment.

Real Wage

The wage rate adjusted for inflation (purchasing power of wages).

Real Income

Income adjusted for inflation.

Inflation Rate

The annual percentage change in the price level.

Shoe-Leather Costs

The increased costs of transactions caused by inflation, such as making more trips to the bank.

Menu Costs

The real costs of changing listed prices (e.g., printing new menus, updating systems).

Unit-of-Account Costs

Costs arising from inflation making money a less reliable unit of measurement.

Nominal Interest Rate

The stated interest rate on a loan, not adjusted for inflation.

Real Interest Rate

The nominal interest rate minus the inflation rate.

Disinflation

A reduction in the rate of inflation.

Market Basket

A hypothetical set of goods and services used to measure price changes over time.

Aggregate Price Level

A measure of the overall level of prices in the economy.

Price Index

A measure of the cost of purchasing a given market basket relative to the cost in a base year.

Consumer Price Index (CPI)

A measure of the average change over time in the prices paid by consumers for goods and services.

Substitution Bias

The distortion that occurs in CPI when consumers substitute cheaper goods for more expensive ones.

GDP Deflator

A price index that measures inflation using the ratio of nominal GDP to real GDP.