AP Macroeconomics Unit 1: 2.1 & GDP overview

macroeconomics

the study of the large economy as a whole

When was macoreconomics created?

during the great depression

Why was macoreconomics created?

1.) measure the health of the whole economy

2.) guide policies to fix problems

private sector

part of the economy run by individuals and businesses

public sector

part of the economy controlled by the government

factor payments

payments for the factors of production (rent, wages, interest, profit)

transfer payments

when the government residistrubtes income (welfare, social security)

subsides

government payments to businesses (primary) and individuals

Who demands in the factor market?

businesses (firms)

Who supplies in the factor market?

households (individuals)

Who demands in the product market?

individuals and the governement

Who supplies in the product market

businesses (firms)

3 macroeconomic goals

1.) promote economic growth

2.) full employment (limit amount)

3.) price stability (limit inflation)

national income accounting

economics collect statistics on production, income, investment, and savings

GDP

(gross domestic product)

• the dollar market value of all final market goods and services within a country in one year

“dollar value”

GDP is measured in USD

“final goods”

GDP only counts new goods and services

“within a country”

GDP measures production within the country’s borders

“one year”

GDP measures annual economic performance (how well the US is doing financially)

GDP annual growth formula

% change in GDP = yr 2 - yr 1/ yr 1 ×100

Why do other countries have higher GDPs?

1,) economic system

2.) rule of law

3.) capital stock

4.) human capital

5.) natural resources

What is NOT included in GDP?

1.) intermediate goods

2.) nonproduction transactions

3.) nonmarket & illegal activies

intermediate goods

goods inside the final goods don’t count

• price of finished car, NOT tires or radio

nonproduction transactions

finanical transactions (nothing produced)

• stocks, bonds, real estate

nonmarket & illegal activies

things made at home (household production)

• unpaid work, black markets

3 ways to calculate GDP

1.) expenditure approach

2.) income approach

3.) value added approach (output)

** all methods should generate the same number

expenditure approach

add all spending on final goods and services produced in a given year

income approach

add all income earned from selling all final goods and services produced in a given year (labor income, rental income, interest income, profit)

labor income

wages earned from performing work

rental income

income earned from property owned by individuals

interest income

interest earned from loaning money to businesses

profit

money businesses have after paying all their costs

value added approach (output)

add the dollar value added at each stage of the production process

Expenditures approach

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

consumer spending (C)

70 % of U.S. GDP

• purchases of final goods and services by individuals

1.) durable goods (car, fridges)

2.) non-durable goods (food, clothes)

3.) services (repairs, tutoring)

investment (I)

16% of U.S. GDP

• business spending on goods and equipment

• ALWAYS when businesses buy capital, NEVER when individuals buy assets

government (G)

17% of U.S. GDP

• schools, roads, tanks (no transfer payments)

• tracks spending in the public sector

net exports (X-M)

3% of U.S. GDP

• exports (X) - imports (M)

X: flow of money to the U.S. in exchange for domestic production

M: flow of money away foromthe U.S. in exchange foreign production

aggregate income

income = r + w + I + p = factor payments

nomial GDP

the current year production measured at current year market prices

real GDP

The current year production is measured with a fixed dollar or based year's price

• holds the value of the dollar constant and is useful for making year-to-year comparisons

MOST IMPORTANT

GDP deflector

a measure of the price level of all good and services in the an economy

GDP deflector formula

nominal/real x 100

inflation formula

yr 2 deflector - yr 1 deflector/ yr 1 deflector x 100

changes in GDP

GDP ↑, the burden of scarcity is lessened for a society

• GDP per capita provides a better measure of individual well-being than GDP

the business cycle

the ups and downs of the economy overtime

peak

temporary maximum in Real GDP

• unemployment rate is below the natural rate of unemployment

• inflation rate is at its highest

recession

contractionary phase

• decline in Real GDP, increase in unemployment

• lower inflation rates

• has to be at least 6 months

trough

bottom of the business cycle

• unemployment at its highest

• iInflationis low, GDP at its lowest

recovery

• where the economy is returning to full employment

• real GDP ↑, unemployment, inflation ↑

• where the economy spends the most time

business cycle info:

• various phases last for different amounts of time

• expansions have lasted longer than ressions

• great depression is an example of a long ressesion/ttough

causes of the business cycle

• irregularity of investment

• changes in productivity/total spending (aggregate demand)’

**durable goods manufacturing is the most suseptible to the business cycle effects