AP Macro Unit 2

For Irondale kids. Because Ackerman can't suck any harder.

Gross Domestic Product (GDP)

Total market value of all final goods and services produced annually within a country

Actual rate of unemployment formula

Frictional + Structural + Cyclical

Natural rate of unemployment formula

Frictional + Structural

Final goods

Products purchased for final use and not resale

Intermediate goods

Products purchased for resale or further manufacturing

Double (multiple) counting

Wrongly including the value of intermediate goods

Consumption

Amount households spend for goods and services

Investment

Spending for the production and accumulation of capital, additions to inventories, and new construction

Government purchases

The expenditures of all governments (federal, state, and local) in the economy for all goods and services

Net Exports

Exports minus imports (X-M)

“Nominal”

Not adjusted for inflation

“Real”

Adjusted for inflation

Price index

Number which shows how the weighted average price of selected goods and services changes through time

Consumer Price Index (CPI)

Number which measures the prices of a fixed market basket of 300+ goods and services bought by a typical consumer

Business cycle

Recurring increases and decreases in the level of economic activity over periods of years

Recession/Contraction

Declining real GDP, lower real income, higher unemployment

Expansion / Recovery

Increasing real GDP, higher real income, lower unemployment

Unemployment rate

Percentage of the labor force unemployed at any time

Frictional unemployment

Type of unemployment caused by temporary layoffs and workers voluntarily changing jobs

Natural rate of unemployment

The full unemployment and employment rate when the economy is achieving potential output. No cyclical unemployment, only frictional and structural

Structural unemployment

Unemployment of workers whose skills are not in demand, who lack skills to obtain employment, are unable to move to places where there are jobs available, or have their jobs replaced by technological advances.

Cyclical unemployment

A type of unemployment caused by insufficient total spending or recession.

Potential output

Amount society could produce when it fully employs its available resources. On PPC line. L, L, C, E

Discouraged workers

Employees who have left the labor force because they have been unable to find employment.

Balance of payments

Statement that summarizes an economy’s transactions with the rest of the world for a specified time period

Financial Account

Part of Balance of Payments that includes asset purchases of stocks, bonds, real estate, investment in factories, and currency

Current Account

Part of Balance of Payments that includes exports, imports, dividends and interest, and transfer payments

Inflation

A rise in the general level of prices in an economy

Rule of 72

The number of years it will take for some measure to double (only applies to positive growth)

Demand-pull inflation

Inflation caused by there being more demand than there is output and the existing price level. Demand > output

Cost-push (supply) inflation

Inflation resulting from an increase in resource costs (labor, capital, land, etc) which leads to an increase in per unit production costs.

Anticipated inflation

Increases in the price level which occur at the expected rate

Unanticipated inflation

Increases in the price level which occur at greater rate than expected

Cost of living adjustment (COLA)

Automatic increase in the incomes of workers or pensions when inflation occurs

Productivity

Output per worker; must increase for economic growth

Deflation

Reduction in an economy’s price level

Factor/Resource market

Households sell

Firms buy inputs

Product market

Goods and services are sold by firms

Goods and services are bought by households

Budget deficit

Government spending is greater than tax revenue

G > T

Budget surplus

Government spending is less than tax revenue

G < T

Balanced budget

Government spending is equal to tax revenue

G = T

Economic growth

Outward shift in PPC, increase in real output (GDP) or real GDP per Capita

Calculating nominal vs real GDP

Current production in current year prices / current production in base year prices

National income

Roughly equal to GDP in the circular flow of money

GDP deflator

(Nominal GDP / Real GDP) x 100

(Nominal GDP / Price index) = Real GDP

GDP per Capita

GDP / Population

Human Capital

Improvement in labor created by education and knowledge

Expenditure Approach

C+I+G+(X-M)

Inflation rate formula

((price level yr 2 / price level year 1) / price level year 1) x 100

((price index yr 2 / price index year 1) / price index year 1) x 100

Real interest rate formula

Nominal interest rate - rate of inflation = real interest rate

Price index formula

(Cost of market basket / base cost of market basket) x 100

Discretionary contractionary fiscal policy

Taxes go up

Government spending goes down

During an expansion

Discretionary expansionary fiscal policy

Taxes go down

Government spending goes up

During a recession

Output per worker formula

Real GDP / # of people working

Sum of current and financial accounts

Zero

Rule of 72 formula

Number of years for variable to double = (72 / annual growth rate of variable)

Income Approach

W+P+I+R