AP Macroeconomics Unit 2: Measuring Economic Performance

Gross Domestic Product

a measure of a country's economic performance, representing the total monetary value of all goods and services produced within its borders over a 12 month period.

Nominal Interest Rates

the interest rates unadjusted for inflation, reflecting the actual monetary cost of borrowing.

Nominal Interest Rate Forumla

Expected Inflation Rate + Real Interest Rate

What is NOT included in the GDP?

Intermediate Products, Underground Economic Activity, Purely Financial Transactions, Used Goods, and Goods Produced for Personal Consumption

What is Included in the GDP

Consumption, Investments in physical capital (not stocks and bonds), Government, Net Exports (Only for Open economies)

Market transactions

The exchange of goods and services through a market.

Disposable income

money income left after all taxes on it have been paid

Output-expenditure model

macroeconomic model describing aggregate demand by the consumer, investment, government, and foreign sectors; GDP=C+I+G+F

Price Index

a measurement that shows how the average price of a standard group of goods changes over time

Real GDP

A measure of how much is produced; the total value of all final goods and services produced in the economy during a year, calculated as if prices had stayed constant at the level of some given base year in order to remove the effects of price changes.

Nominal GDP

a measure of how much is spent on output; the total value of all final goods and services produced in the economy during a given year, calculated with the prices current in the year in which the output is produced.

Consumer Price Index

an index of the cost of all goods and services to a typical consumer; For consumer price basket problems

Consumer Price Index Formula

(Value of Market Basket in the Given Year/Value of Market Basket in the Base Year)*100

Market basket

representative group of goods and services used to compile the consumer price index

Underground economy

Economic activity based on buying and selling products and services illegally

Standard of living

Quality of life based on ownership of necessities and luxuries that make life easier.

Real GDP per capita

real GDP divided by the total population

GDP deflator

Price index used to measure the inflation rate by comparing nominal GDP to real GDP.

GDP Deflator Formula

(Nominal GDP/Real GDP) *100

Contraction

Below potential output line; layoffs and loss of income

peak

Above Potential output line

trough

lowest point in the economic cycle

expansion

A period of economic growth as measured by a rise in real GDP

unemployed

people not working who have looked for work during previous 4 weeks

Not A part of Labor Force

Anyone less than 16, in the military, institutionalized, discouraged workers, retirees

Labor Force Participation Rate Formula

Labor Force/Working Age Population

Labor Force

the number of people in a population who are either employed or unemployed (including part-time employees)

Unemployment

people classified as unemployed if they do not have a job, have actively looked for work in the prior four weeks, and are currently available for work

Unemployment Rate Formula

(Unemployment/Labor Force) * 100

Natural Rate of Unemployment Formula

Frictional + Structural

Current Natural Rate of Unemployment in US

5%

Frictional Unemployment

Don't have a job because you are looking for a better job

Structural Unemployment

skills become outdated and people get laid off

Cyclical Unemployment

unemployment that rises during economic downturns and falls when the economy improves; due to decline in GDP

Inflation

A rise in prices, which can be translated as the decline of purchases power over time

Inflation Rate Formula

((Price Level in Year 2 - Price Level in Year 1)/(Price Level in Year 1))*100

Demand Pull inflation

When demand for goods/service exceeds production capacity

Cost Push inflation

increases in the cost of production lead to supply shortages across the economy, leading to an increase in prices.

Built-In

When prices rise, wages rise too, in order to maintain living costs

When is inventory included in GDP?

Inventory that is not sold is included in GDP from whenever they were produced

Real Interest Rate Formula

Nominal Interest Rate - Expected Inflation Rate

You spend a week painting the family home (Your hours of effort)

Not in GDP; Personal Use

You help for several valuable hours at the Pro-Grad fundraiser

Not in GDP; Charity

General Motors buys 100 robots for use in an assembly plant

Yes in GDP; Income

Nike produces millions of dollars’ worth of shoes in Indonesia

Not in GDP; Production is outside of US

Expenditure on a bulldozer is a consumption good

False

The truth of net exports of goods and services can be negative

True

The value of production equals income, which equals expenditure

True

A recession follows a business cycle peak

True

The labor force participation rate measures the percentage of the labor force that is employed

False

Potential GDP is the amount of real GDP when the economy is full employment

True

The CPI is reported once every week

False

If the nominal interest rate is 10% a year and the inflation rate is 5% a year, then the real interest rate is 5% a year

True