AP MACRO UNIT 2

macroeconomics

the study of the large economy as a whole. It is the study of the big picture.

why was macro created

1. Measure the health of the whole economy

2. Guide government policies to fix problems

major economic goals for countries

1. Promote Economic Growth

2. Limit Unemployment

3. Keep Prices Stable (Limit Inflation)

national income accounting

when economists collect statistics on production, income, investment, and savings.

gross domestic product (GDP)

the dollar value of all final goods and services produced within a country’s borders in one year.

key parts of the definition of GDP

1. Dollar value- is measured in dollars

2. Final Goods- does not include the value of intermediate goods

3. One Year- measures annual economic performance

how GDP is used

1. Compare to previous years (Is there growth?)

2. Compare policy changes (Did a new policy work?)

3. Compare to other countries (Are we better off?)

GDP per capita

GDP divided by the population. It identifies on average how many products each person makes. It is the best measure of a nation’s standard of living

what is NOT included in GDP

1. intermediate goods

2. non-production transactions

3. non-market and illegal activities

expenditures approach (calculating GDP)

Add up all the spending on final goods and services produced in a given year

income approach (calculating GDP)

Add up all the income that resulted from selling all final goods and services produced in a given year

4 components of GDP (expenditures approach)

1. consumer spending

2. government spending

3. investment

4. net exports

components of income approach

1. labor income

2. rental income

3. interest income

4. profit

   These are called FACTOR PAYMENTS. Labor earns wages, land earns rent, capital earns interest, and entrepreneurship earns profit.

nominal GDP

GDP measured in current prices. It does not account of inflation from year to year.

real GDP

GDP expressed in constant, or unchanging, dollars. Adjusts for inflation.— THE BEST TO MEASURE ECONOMIC GROWTH

unemployment

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

unemployment rate

The percent of people in the labor force who wants a job but are not working.

(# of unemployed/ # in labor force) x 100

included in labor force

• Above 16 years old

• Able and willing to work

• Not institutionalized (in jails or hospitals)

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

frictional unemployment

temporary unemployment or being between jobs

individuals are qualified workers with transferable skills

structural unemployment

changes in the labor force makes some skills obsolete

these workers DO NOT have transferable skills and these jobs will never come back— workers must learn new skills

cyclical unemployment

unemployment caused from a RECESSION

as a demand for goods and services falls, demand for labor falls and workers are fired

sometimes called “demand deficient unemployment”

natural rate of unemployment (NRU)

frictional + structural unemployment

the amount of unemployment that exists when the economy is healthy and growing

full employment output (Y)

the real GDP created when there is no cyclical unemployment

the US is at this when there is 4-6% unemployment

discouraged workers

people who are no longer looking for a job because they have given up

labor force participation rate

% of population in the labor force. If people leave labor force the unemployment rate falls

underemployed workers

someone who wants more hours but can’t get them is still considered EMPLOYED

race/age inequalities

the overall unemployment rate does not show disparity for minorities and teenagers

illegal labor

many people who work off the books

inflation rate

the percent change in prices from year to year

price indices

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

deflation

decrease in general prices or a negative inflation rate— bad because people will hoard money (financial assets)

disinflation

prices increasing at a slower rate

those hurt by inflation

• lenders- people who lend money at fixed interest rates

• people with fixed incomes

• savers

those helped by inflation

• borrowers- people who borrow money

• a business where the price of the product increases faster than the price of resources

nominal wage

wage measured by dollars rather than purchasing power

real wage

wage adjusted for inflation

consumer price index (CPI)

the most commonly used measurement of inflation for consumers

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

market basket

a selected mix of goods and services that tracks the performance of a specific market or segment

CPI is a popular one

problems with CPI

1. substitution bias- as prices increase, consumers buy less of this product and more substitutes

2. new products- market basket may not include the newest consumer products

3. product quality- ignores both improvements and decline in product quality

GDP deflator

measures the prices of all goods produced

(nominal GDP/ real GDP) x 100

nominal GDP

(deflator x real GDP) / 100

causes of inflation

1. the government prints too much money (quantity theory)

2. demand-pull inflation (demand pulls prices up)

3. cost-push inflation (higher production cost increase prices)

nominal interest rates

the percentage increase in money that the borrower pays NOT adjusting for inflation

real interest rates

the percentage increase in purchasing power that a borrower pays (adjusted for inflation)