Unit 2 - AP Macroeconomics

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National income and product accounts

Accounts that keep track of the flows of money among different sectors of the economy.

Product Markets

Markets where goods and services are bought and sold.

Consumer spending

Households spending on goods and services.

Factor markets

Markets where resources, especially capital and labor, are bought and sold.

Government spending

Total expenditures on goods and services by federal, state, and local governments.

Taxes

Required payments to the government.

Tax revenue

The total amount the government receives from taxes.

Disposable income

Income plus government transfers minus taxes; the total amount of household income available for consumption.

Government transfers

Payments that the government makes to individuals without expecting a good or service in return.

Private savings

Equal to disposable income minus consumer spending; a household’s disposable income.

Financial markets

Channels private savings into investment spending and government borrowing.

Government borrowing

The amount of funds borrowed by the government in the financial market.

Investment spending

Spending on new productive physical capital, such as machinery and structures, and changes in inventories.

Inventories

Stocks of goods and raw materials held to facilitate business operations.

Exports

Goods and services sold to other countries.

Imports

Goods and services purchased from other countries.

Gross domestic product (GDP)

Total value of all final goods and services produced in a year.

Expenditure approach

Calculating GDP using the sum of consumer spending, investment spending, government purchases, and exports minus imports.

Aggregate spending

Sum of consumer spending, investment spending, government purchases, and exports minus imports.

Income approach

Adds up total factor income earned by households from firms in the economy, including rent, wages, interest, and profit.

Value added approach

Surveys firms and adds up their contribution to the value of final goods and services.

Final goods and services

Goods or services that are sold to the final consumer.

Intermediate goods and services

Goods and services bought from one firm by another firm to be used as inputs into the production of final goods and services.

Net exports

The difference between the value of exports and the value of imports (X-M).

Value added

The value of sales minus the value of its purchases of inputs.

Nonmarket transactions

Goods and services that are not bought and sold in a legal market.

Employed people

People who are currently holding a job in the economy, either full time or part time.

Unemployed

People who are actively looking for work but aren’t currently employed.

Labor force

The sum of the employed and the unemployed.

Labor force participation rate

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

Unemployment rate

The percentage of the total number of people in the labor force who are unemployed.

Discouraged workers

Non-working people capable of working who have given up looking for a job due to the state of the job market.

Underemployed

Workers who would like to work more hours or who are overqualified for their jobs.

Frictional unemployment

Unemployment due to the time workers spend in the job search.

Structural unemployment

Unemployment resulting when workers lack the skills required for available jobs.

Natural rate of unemployment

Unemployment rate arising from the effects of frictional plus structural unemployment.

Cyclical unemployment

Deviation of the actual rate of unemployment from the natural rate.

Inflation

Rise in overall price level.

Deflation

Falling in overall price level.

Price stability

When the overall price level is changing only slowly if at all.

Real wage

Wage rate divided by the price level to adjust for inflation.

Real income

Income divided by the price level to adjust for inflation.

Inflation rate

The percentage increase in the overall levels of prices per year.

Aggregate price level

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

Market basket

A hypothetical set of consumer purchases of goods and services.

Base year

The year chosen for comparison when calculating a price index.

Price index

Measures the cost of purchasing a given market basket in a given year.

Consumer price index

Measures the cost of a market basket for a typical urban American family.

Substitution bias

Occurs in the CPI due to households substituting away from items with rising prices.

Producer price index (PPI)

Measures the prices of goods and services purchased by producers.

Nominal interest rate

Interest rate actually paid for a loan.

Real interest rate

Nominal interest rate minus the rate of inflation.

Disinflation

The process of bringing the inflation rate down.

Aggregate output

The total quantity of final goods and services produced within an economy.

Real GDP

The total value of all final goods and services produced in the economy during a given year, adjusted for price changes.

Nominal GDP

The total value of all final goods and services produced in the economy calculated with current year prices.

GDP Deflator

100 times the ratio of nominal GDP to real GDP in that year.

GDP per capita

GDP divided by the size of the population; equivalent to the average GDP per person.

Business cycle

The alternation between economic downturns and economic upturns.

Recessions

Periods of economic downturns when output and employment are failing.

Trough

Low minimum in the business cycle.

Expansions

Periods of economic upturns when output and employment are rising.

Peak

High maximum in the business cycle.

Depression

A very deep and prolonged economic downturn.

Economic growth

An increase in the maximum amount of goods and services an economy can produce.

Full employment level of output

Level of real GDP that the economy can produce if all resources are fully employed.

Potential output

The level of real GDP the economy would produce if all prices were flexible.

Output gap

The difference between actual output and potential output.