AP Macro Unit 2 (copy)

Private Sector

Part of the economy that is run by individuals and businesses.

Public Sector

Part of the economy that is controlled by the government.

Factor Payments

Payments for the factors of production (rent, wages, interest, and profit).

Transfer Payments

When the government redistributes income (welfare, social security, etc.).

Subsidies

Government payments to businesses.

Gross Domestic Product (GDP)

Dollar Value of all final goods and services produced in one year.

GDP per Capita

A measure of a country’s output per person; a universal measure of prosperity or standard of living.

Not Included in GDP

Intermediate goods, nonproduction transactions, nonmarket and illegal activities, and transfer payments.

GDP (Expenditures Approach) formula

GDP (Y) = Consumer Spending (C) + Business Investment (I) + Government Spending (G) + Net Exports (X – M).

% of change in GDP formula

(Year 2 – Year 1/Year 1) x 100.

Labor Force

The employed (full or part time) and the unemployed (those seeking employment).

Natural Rate of Unemployment (NRU)

The amount of unemployment that exists when the economy is healthy.

Full Employment

A condition when anyone who wants to work can get work.

Frictional Unemployment

Workers who are either in between jobs or waiting to take jobs in the near future.

Structural Unemployment

Caused by changes in technology or of skills required to work.

Cyclical Unemployment

Caused by a contraction or recession in an economy.

Seasonal Unemployment

Someone who is unemployed due to the season/time of year.

Inflation

An overall rise in the price of goods and services.

Deflation

An overall drop in the price of goods and services.

Consumer Price Index (CPI)

An index that measures the prices of a fixed 'market basket' of goods and services.

Nominal Variables

Measure of dollar amounts not adjusted for inflation.

Real Variables

Variables adjusted for inflation and measured in real terms.

Inflation Rate formula

(CPI in year 2 – CPI in year 1)/CPI in year 1 x 100.

General effect of inflation

Prices increase, so purchasing power decreases.

Inflationary Spiral

When inflation leads to more inflation through wage increases.

Nominal GDP

Total value in dollars of all the goods produced in a year, unadjusted for inflation.

Real GDP

Nominal GDP adjusted for inflation and deflation.

GDP Deflator

A measurement used to determine price inflation or deflation in a specific year.

Business Cycle

A mix of periods of economic expansion and contraction.

Recession

Periods of economic contraction lasting a few months to several years.

Depression

A prolonged recession lasting a minimum of three years.

Business Cycle Phases

Expansion, peak, contraction, trough.

Output Gap

Difference between actual output and potential output.

Disinflation

A marginal reduction in the inflation rate over a short period of time.

Beneficiaries of inflation

Anyone who has borrowed money.

Victims of inflation

Anyone or any institution that has loaned money.

Devaluation of savings

Nominal dollar amount in the account is less than the real value.

Costs of Inflation

Prices increase leading to decreased purchasing power.

Limitations of Unemployment Rate

Does not include chronically unemployed or discouraged workers.

Labor force participation rate formula

Labor force/working age population (16 and over) x 100.