ap macro -- unit 3

GDP

total value of all finished goods and services produced in a country in 1 year

consumption

people buy finished goods

investment

business purchases (buying capital) and adding goods to inventory, people buying homes

government purchase

goods, services, wages

net exports (NX)

exports minus imports

real GDP

measures GDP using changes in production, not changes in price

nominal GDP

measures GDP using changes in production and price

GDP deflator

(nominal GDP / real GDP)(100)

business cycle

the cycle of economic contraction and expansion

peak

economy is growing and money is circulating

trough

economy is growing at a slower rate

contraction

economic growth is shrinking

expansion

economic growth is increasing

recession

GDP shrinks

leakage

money is taken from circular flow

taxes and imports are examples of

leakages

labor force

all adults who can and want to work

labor force participation rate

labor force / adult population

unemployment rate

percentage of the labor force not working

frictional unemployment

people are “voluntarily” between jobs

indicates a healthy economy with jobs available

structural unemployment

the economy eliminates someones job because of technological advancements/trade

cyclical unemployment

job loss during recession or contraction

full employment

0% cyclical unemployment

inflation

rapid increase in price level or money supply

monetarist equation

money supply = price level

CPI

basket current year

---

basket base year

LRAS

total potential economic output

all resources efficiently used, full employment (Y*)

SRAS

firms choose output based on cost

AD

consumption + investment + government spending + net exports

supply shock

SRAS shifts left, shocking the economy and driving up prices

demand-pull inflation

AD shifts right and prices go up “later”

cost-push inflation/stagflation

SRAS shifts left and prices rise, followed by less output

selling something from inventory adds ____ to GDP

nothing (positive consumption and negative investment)