AP Macro Unit 2

economic systems answer what questions

what to produce, how to produce, for whome

traditional economy

customs, traditions, belief systems, function through batering and trading and usually have little surplus

command economy

central gov determines the answers to the 3 economic questions, they own and manage the economic resources

socialism

belief that democratic means should be used to distribute evenly through society

communism

centrally planned economy with all economic and political power in the hands of the government

Disadvantages of a command economy

central planners cannot effectively coordinate production, innovation and productivity are stifled.

the invisible hand

market smith, the comp. market determines what we will provide

free market

laissez faire, producers must adapt, consumers vote with dollars.

advantages of free market

allocative efficiency, free enterprise, free economic choice.

national accounts

keep track of the spending of consumers and sales of producers, buisness investment spending, gov’t purchases

GDP

the total market value of all final goods and services produced within the geographic US within a given year

Intermediate goods are…

not included in GDP

Ways to measure GDP

expenditures approach, income approach, value added approach

Expenditure approach

G+I+G+Xn

consumer expenditure

house and rent, material items, food, jewlery, gas, medical expenses

Ig includes?

the purchase of new CAPITAL goods, new homes by households, new additions to inventotries. DOES NOT include equities or bonds or purely financial transactions.

net investment

Ig-depreciation

Gov’t expenditure

does not include transfer payments (SS, medicare, etc)

Income approach

WRIP (wages, interest, rent, profits)

Value added approach

the value of all production- the value of intermediate goods

Gross National Product

Anything produced ANYWHERE by an american company

GDP per capita

Real GDP/population

a real measure

has been adjusted for changes in price over time

GDP deflator= nominal GDP/Real GDP x 100

Real GDP= nominal GDP/deflator x 100

how a society can increase its real output and income

by increasing its resources and increasing the productivity of those resources

business cycle

the short-run alternation between economic downturns, known as recessions and economic upturns, known as recoveries and expansions

Business cycle stages

peak, recession, trough, recovery, peek, etc (growth all throughout)

peak

maximum, unemployment is low and inflation is prob increasing

recession

must last 6 months at east, decline in real GDP and increase in unemployment

trough

bottom of cycle, unemployment is high and inflation is low

a depression

is a deep and prolonged economic downturn

stagflation

a time of increasing inflation and increasing unemployment

misery index

when you add inflation rate to unemployment rate

unemployment rate

# of unemployed ppl/ labor force x100

labor force

U+E

labor force participation rate

labor force/working age population x100

full time

works > 35 hours a week

discouraged worker

does not have a job, is capable, but has made no efforts in finding a job in the past 4 weeks

frictional

normal labor turnover, finding new jobs

structural unemployment

when changes in tech or international comp change the skills needed to do a job

seasonal unemployment

happens when industries slow or shut down for a season

cyclical unemployment

during economic downturns

natural rate of unemployment

(frictional+seasonal+structural)/labor force

potential GDP

where the GDP could be if it were operating at full force

Okun’s law

for ever 1% unemployment rate exceeds natural rate, a negative GDP gap of about 2 % occurs

inflation

occurs when price level is rising

deflation

occurs when price level is falling

CPI

measure of the overall costs of goods and services bought by a typical consumer

when the CPI rises,

the typical family has to spend more dollars to maintain the same standard of living

CPI formula

cost of Mb in given year/cost of Mb in base year x 100

inflation rate

CPI in year 2- CPI in year 1/ CPI in year 1×100

demand pull inflation

spending>production, too much spending

cost push spending

prices rise because of a rise in per unit production costs, such as wages

quantity theory

too much money in an economy causes inflation

unanticipated inflation hurts…

fixed income groups, savers (interest rate returns may not cover inflation), lenders

unanticipated inflation helps

debtors, they are paying back cheaper dollars

inflation premium

the amount an interest rate is raised to cover costs of anticipated inflation

failures of CPI

substitution bias, introduction of new goods, unmeasured quality changes

real income formula

nominal income/CPI x100

nominal interest rate

not corrected for infation

real interest rate

nominal interest rate that has been corrected for the effects of inflation