AP Macro Unit 2 Flashcards

Circular Flow Model

Circular Flow Model

Shows the cycle of money and goods and services

Product Market

It is through this market that households use the money they receive through the resource market. Here the household is the demand or and the businesses are the suppliers

Factor/Resource Market

Through this market, households supply the resources for businesses and businesses demand the resources

Households/Individuals

They are the demanders in the product market and the suppliers in the factor/resource market

Rent

The income payment for rent

Wages

The income payment for labor

Intrest

The income payment for capital

Profit

The income payment for entrepreneurship

This is the money after paying dividends and other expenses

Revenue

This is all of the money coming in

Gross Domestic Product

The value of the total goods and services produced within the borders of the United States, whether by American or foreign supplied resources

GDP is a monetary measure

Expenditure Approach and each variable

GDP = C + I + G + Xn (X-M)

C) Consumer Spending

I) Investment

G) Government Spending

Xn) Net Exports

Income Approach and each variable

GDP = W + i + PR + R + indirect business taxes + depreciation + Net Foreign Income

W) Wages

i) intrest

PR) Profit

R) Rent

Ind. T.) Taxes charged to the business that are passed along

Dep) Estimate useful life

NFI) Net output produced by Americans outside of the US

Value-Added Approach

Summing up the value added by all the intermediate producers in a nation

Intermediate Goods

Goods and services that are used for further processing in manufacturing or resale are used in production and are not counted in GDP

Nonmarket transactions

GDP doesn’t measure these. Things such as:

• Illegal sales/Underground Market

• Items bartered

• Goods/Services sold in home unless reported

Transfer Payments

Not counted in GDP. Things such as:

• Public Transfer Payments (Social Sec.)

• Private Transfer Payments (Gifts etc.)

• Security Transactions (Stocks + Bonds)

Unemployment

Criteria:

• At least 16 years old

• Be able to work

• Looking for employment

Frictional Unemployment

This takes into account those workers that are between jobs. They are either searching for jobs, or waiting to take jobs in the future.

Structural Unemployment

Change in the demand for labor overtime leads to some people becoming unemployed because their job is no longer needed. This also includes shifts in geography.

Cyclical Unemployment

Unemployment caused by the contractionary phase of the business cycle. Decline in GDP

Unemployment Rate

# of unemployed/total labor force

Natural Rate of Unemployment

The unemployment rate that would exist when the economy produces full employment real output. The sum of frictional and structural unemployment.

Full Employment

It is not zero. Instead, it is when everybody who is looking for a job has a job.

Labor Force

Employed + Unemployed

Labor Force Participation Rate

# of employed + unemployed / total non institutionalized population

Inflation

A rise in the general level of prices for goods and services in an economy over time. It erodes purchasing power and reduces the value of money.

Consumer Price Index

Measures the change in income a consumer would need in order to maintain the same standard of living over time under a new set of prices, as under the original set of prices

CPI = Current Year Market Basket / Base Year

x100

Inflation Rate

Found by calculating the percent change in a price index, such as CPI or the GDP deflator

Unanticipated Inflation

Inflation that comes as a surprise. It hurts those that loan money but benefits the borrower.

Real Values

What your money can actually buy. What is it actually worth

Real = Nominal/PI x 100

Real GDP

The total value of all final goods and services produced in a given year. Calculated using the prices of a selected base year.

Real GDP = Nominal GDP/CPI x 100

Nominal Values

The amount of goods and services that a dollar can buy.

$10 = $10

Nominal GDP

The total dollar value of all goods and services produced in a given year.

GDP Deflator

Reflects the price of goods and services but not the quantities. How much prices have changed without worrying about changes in quantity.

GDP Deflator = Nominal GDP/Real GDP x 100

Real GDP per Capita

Real GDP per Capita = Real GDP/Population