AP Macroeconomics Unit 2: Economic Indicators and the Business Cycle

Vocabulary practice flashcards covering circular flow, GDP expenditure components, limitations of GDP, unemployment types, labor market formulas, inflation and real wage adjustments, nominal vs. real GDP, and business cycle gaps from AP Macroeconomics Unit 2.

Market for Factors of Production

The market in the circular flow diagram that connects spending by firms to household income.

Expenditures Approach to GDP

A method of measuring gross domestic product that sums consumption spending, investment spending, government spending, and net exports.

Income Inequality Limitation of GDP

A limitation of gross domestic product describing its failure to account for how income is distributed across households in a nation.

Unsold Inventories

Goods produced within the borders of a country that remain unsold, which are officially included in the calculations of gross domestic product.

Oil Spill Cleanup in GDP

An economic activity whose market-based expenditures are included in United States gross domestic product, unlike unpaid domestic activities or illegal transactions.

Discouraged Worker

A person who wants to work but has been unable to find a job and has abandoned their job search, excluding them from the official labor force.

Structural Unemployment

A type of unemployment caused by fundamental changes in the economy or technology, such as factory workers displaced by automation.

Labor-Force Participation Rate (LFPR)

The percentage of the civilian non-institutional population age 16 and older that is either employed or unemployed, calculated as $\left(\frac{\text{Labor Force}}{\text{Civilian Population}}\right) \times 100$.

Unemployment Rate (UR)

The percentage of the labor force that is without work and actively seeking a job, calculated as $\left(\frac{\text{Unemployed}}{\text{Labor Force}}\right) \times 100$.

Real Wage

The purchasing power of nominal earnings adjusted for changes in the price level, calculated as $\left(\frac{\text{Nominal Wage}}{\text{CPI}}\right) \times 100$.

Disinflation

A slowdown in the rate of increase in the consumer price index over time.

Unanticipated Inflation

A situation where the actual inflation rate exceeds the expected inflation rate, which harms lenders with fixed-interest rate loans and benefits borrowers.

Nominal Gross Domestic Product (GDP)

The monetary value of all final goods and services produced within a country evaluated using current-year prices.

Real Gross Domestic Product (GDP)

The monetary value of all final goods and services produced within a country evaluated using constant base-year prices, calculated as $\left(\frac{\text{Nominal GDP}}{\text{GDP Deflator}}\right) \times 100$.

Output Gap

The difference between actual gross domestic product and potential gross domestic product.

Full Employment in the Business Cycle

The point where actual real GDP equals potential real GDP, meaning the economy is operating without an output gap.

Trough

The lowest turning point of a business cycle, characterized by a recessionary gap where actual output falls below potential output.

Market for Factors of Production

The component of the circular flow diagram that connects spending by firms to household income through the purchase and sale of productive resources such as labor, land, and capital.

Expenditures Approach to Calculating GDP

A method of measuring gross domestic product that sums consumption spending ($C$), investment spending ($I$), government spending ($G$), and net exports ($NX$).

Nominal GDP Expenditures Calculation (Country X)

Using Country X's 2017 macroeconomic data, nominal GDP equals $19\text{ billion dollars}$, calculated by adding consumption ($13\text{ billion}$), investment ($4\text{ billion}$), government spending ($3\text{ billion}$), and net exports ($-1\text{ billion}$).

Limitation of Gross Domestic Product (GDP)

A shortcoming of GDP as an economic indicator is that it does not account for the distribution of income in a nation or income inequality, and omits non-market or do-it-yourself activities.

Unsold Inventories

Physical goods produced within the borders of a country during a given period that remain unsold; these are included in the nation's GDP calculations under business investment spending.

Oil Spill Cleanup (in GDP)

An economic activity accounted for in the United States gross domestic product because it generates market transactions and paid cleanup expenditures, unlike unpaid household labor or free goods.

Discouraged Worker

An individual who has been unable to find employment and has abandoned their job search, thereby becoming excluded from both the count of the unemployed and the labor force.

Structural Unemployment

A category of unemployment that occurs when there is a fundamental mismatch between workers' skills and the demands of the labor market, such as factory workers displaced by automation.

Labor-Force Participation Rate (LFPR)

The percentage of the civilian non-institutional population age $16$ and older that is either employed or unemployed; with $150\text{ million}$ in the labor force out of $250\text{ million}$, the LFPR is $60\%$.

Unemployment Rate (UR)

The percentage of the labor force that is without work and actively seeking employment; given $15\text{ million}$ unemployed out of a labor force of $150\text{ million}$, the UR is $10.0\%$.

Inflation Rate

The percentage change in a price index over a given time period; an increase in the consumer price index (CPI) from $100$ on January 1st, 2017, to $110$ on January 1st, 2018, represents an inflation rate of $10\text{ percent}$.

Real Wage

The purchasing power of a worker's wage after adjusting for price level changes; for a worker earning a nominal wage of $\text{\$}10\text{ per hour}$ when the CPI rises from a base of $100$ to $125$, the real wage equals $\text{\$}8\text{ per hour}$.

Disinflation

A slowdown or decrease in the rate of increase of the consumer price index (the inflation rate is positive but declining).

Unanticipated Deflation Effect on Fixed Interest Rates

When prices unexpectedly fall (e.g., by $5\%$) during the term of a fixed-interest certificate of deposit (e.g., at $3\%$), the real interest rate rises, causing the saver/lender to gain and the issuing bank to lose.

Actual Inflation Exceeding Expected Inflation

A situation where price growth surpasses anticipated rates, which erodes the real value of future dollar payments and harms lenders with fixed-interest rate loans while benefiting borrowers.

Fixed Wage Contracts under Unexpected Inflation

When workers receive a negotiated fixed pay increase (such as $3\%\text{ per year}$) while actual inflation turns out to be higher (such as $4\%$), workers are worse off due to falling real wages and employers are better off.

Nominal GDP versus Real GDP

Nominal GDP measures the market value of final output using current prices, while Real GDP measures the value of final output using constant base-year prices to remove the distortion of price changes.

Real Gross Domestic Product Formula

The equation used to convert nominal economic output into constant dollars: $\text{Real GDP} = \left(\frac{\text{Nominal GDP}}{\text{GDP deflator}}\right) \times 100$.

Real GDP Calculation (Base Year 1984)

For an economy in 2011 with a nominal GDP of $\text{\$}15\text{ billion}$ and a GDP deflator of $200$, the real GDP in base-year 1984 dollars is equal to $\text{\$}7.5\text{ billion}$.

Output Gap

The difference between an economy's actual gross domestic product (real GDP) and its potential gross domestic product (potential real GDP).

Full Employment on the Business Cycle

The point in time on a business cycle graph where actual real GDP equals potential real GDP, meaning there is neither an inflationary gap nor a recessionary gap.

Trough of the Business Cycle

The bottom turning point of the business cycle where actual real GDP reaches its cyclical low below potential GDP, indicating the presence of a recessionary gap.