AP Macro Unit 2

Product Market

The market in which consumers (households) buy the goods and services (products) from producers (firms) (People going to stores or shopping online for themselves)

Factor Market

The market in which producers  buy the factors of production to make more goods and services from the consumers (Firms paying their workers, buying more resources to make their goods and services, rent on land, profit)

Gross Domestic Product (GDP)

The market value of all final goods and services produced within a country’s borders within a certain period of time (usually 1 year)

Aggregate Output

What the whole economy can produce

Income Approach to GDP

Wages+Rent+Interest+Profits+Taxes

Expenditure Approach to GDP

Consumers + Income + Government Spending + (Exports - Imports)

Durable Goods

Goods that last longer than one year

Nondurable Goods

Goods that last for less than one year

Gross Investment

The market value of the final goods and services purchased by businesses in a given time period (15% of GDP)

Consumer Spending

The market value of all final goods and services purchased by consumers within a given time period (70% of GDP)

Inventory

The amount of final goods produced in the economy by firms that are not sold by the end of the given time period

Government Spending

The market value of the final goods and services purchased by the government in a given time period (20% of GDP)

Net Exports (X_n)

Exports - Imports (-5% of GDP)

Exports

The market value of goods or services produced in one country and sent to another country

Imports

The market value of goods or services brought into the country (purchased) that were produced in another country

Leakages

When money leaves the main flow of the circular flow - either going into financial institutions or to the government or to foreign countries

GDP Per Capita

GDP / Population

Labor Force Participation Rate

Labor Force (Employed and Unemployed) / Civilian Noninstitutional Population * 100

Unemployment Rate

Unemployed / Labor Force * 100

Natural Rate of Umemployment (NRU)

5% unemployment in the USA

Frictional Umemployment

Unemployment that exists when people are looking for a job after schooling or have moved to another city (part of the NRU)

Structural Unemployment

Unemployment that occurs when workers’ skills do not match the jobs that are available i.e. skill are replaced by technology or obsolete to the economy (part of the NRU)

Cyclical Unemployment

Unemployment that rises during economic recessions

Okun’s Law (Rule of Thumb)

A 1% increase in cyclical unemployment leads to 2% decrease in output for the economy (GDP)

Discouraged Workers

People who get frustrated looking for a job so they quit looking (but they would like a job) and are no longer counted in the unemployment rate

Underemployed

Working at a job that is “below” your skill set (and usually makes less money than you have the potential to make)

Inflation

A general increase in prices

Consumer Price Index (CPI)

One of the price indices used by the government (Bureau of Labor Statistics) to measure inflation in the economy

Market Basket Calculation

Multiply quantity by the price of each good and add them together.

CPI formula

Price of Current Market Basket / Price of Market Basket in Base Year *100

Rate of Inflation

CPI_{Current Year} - CPI_{Earlier Year} / CPI_{Earlier Year} * 100

Demand-Pull Theory

Inflation that occurs when demand for goods exceeds existing supplies

Cost-Push Theory

Inflation that occurs when producers raise prices in order to meet increased production costs

Quantity Theory

Inflation that occurs when too much money is “printed”

Stagflation

A period of inflation and decreased GDP (prices rising during a recession - not good)

Hyperinflation

Out of control inflation

Deflation

A general decrease in prices (usually happens in a recession)

Disinflation

When the inflation rate decreases

Core Inflation

The inflation rate with volatile food and energy prices taken out of the market basket, because the prices of those 2 items can cause the inflation rate to become innacurate

People Hurt By Inflation

Lenders, Fixed-Income, and Savers

People Helped (or unaffected) By Inflation

Borrowers, Flexible Income, and businesses where the price of their good rises faster than their costs of production

Nominal Interest Rate Calculation

Real Interest Rate + Rate of Inflation

GDP Deflator

A price index used by the BLS to measure nominal GDP compared to real GDP

GDP Deflator Calculation

Nominal GDP / Real GDP * 100

Nominal Income

The amount of income received without inflation being taken into consideration

Real Income

Takes inflation into account

Real Income

(1 - Inflation Rate) * Nominal Income

Business Cycle

A graph illustrating the short-term variations and long-term growth

Recession

Six consecutive months of decline (contraction) in real GDP

Depression

A long or severe recession