AP Macroeconomics Terms

Investment

Investment is the purchase of goods (such as machinery, factories, or inventory) that will be used to produce other goods and services in the future. In macroeconomics, it refers specifically to business spending on capital goods and is a component of GDP, not to be confused with buying stocks or bonds

Human Capital

Human capital is the collective skills, education, experience, and abilities of workers that increase their productivity and value to employers. It includes education, training, health, and on-the-job experience

Gross Domestic Product (GDP)

GDP is the total market value of all final goods and services produced within a country in a given year.

• Included in GDP: Consumption, investment, government spending, and net exports (exports minus imports).

• Not included in GDP: Transfer payments (like Social Security, welfare), intermediate goods, used goods, and financial transactions (like stocks and bonds)

Frictional Unemployment:

Short-term, voluntary unemployment when people are between jobs or entering the workforce (e.g., recent graduates job hunting).

Structural Unemployment:

Long-term unemployment caused by changes in the economy, such as new technology or shifting industries, which make some skills obsolete.

Cyclical Unemployment:

Unemployment caused by downturns in the business cycle, such as during a recession

Stagflation

Stagflation is a rare economic condition where slow or stagnant economic growth, high unemployment, and high inflation occur at the same time

Cost-Push Inflation

Inflation caused by rising production costs (like wages or raw materials), which leads to decreased aggregate supply and higher prices

Demand-Pull Inflation:

Inflation caused by increased aggregate demand that outpaces aggregate supply, often described as "too much money chasing too few goods"

Fiscal Policy:

Government actions involving changes in taxation and government spending to influence the economy

• Included: Taxes, government spending.

Monetary Policy:

Central bank actions to control the money supply and interest rates to stabilize the economy

• Included: Open market operations (buying/selling bonds), changing the reserve requirement, changing the discount rate, and other tools like interest on reserves.

Velocity of Money

The velocity of money is the rate at which money circulates in the economy, calculated as the ratio of nominal GDP to the money supply. It measures how often a dollar is used to purchase goods and services in a given period

Money Supply

The money supply is the total amount of money available in an economy, commonly measured as:

• M1: Currency in circulation plus checkable (demand) deposits.

• M2: M1 plus savings accounts and small time deposits

Real vs. Nominal Interest Rates

• Nominal Interest Rate: The stated rate, not adjusted for inflation.

• Real Interest Rate: The nominal rate minus the expected inflation rate; it reflects the true cost of borrowing and the real yield to lenders

• Formula: Real Interest Rate = Nominal Interest Rate – Expected Inflation

Deficit:

The amount by which government spending exceeds tax revenues in a given year

Debt:

The total accumulation of past deficits minus surpluses; the government’s total outstanding borrowing

Crowding Out

Crowding out occurs when increased government spending leads to higher interest rates, which reduces private investment spending. This often happens when government borrowing increases the demand for loanable funds, pushing up interest rates and making it more expensive for businesses to borrow and invest1318

Net Exports

Net exports are the value of a country's exports minus its imports.

• Formula: Net Exports = Exports – Imports
  A positive value means a trade surplus; a negative value means a trade deficit

Balance of Payments

A record of all economic transactions between a country and the rest of the world in a year

Current Account (CA):

Tracks trade in goods and services, net investment income, and net transfers.

Capital/Financial Account (CFA):

Records the purchase and sale of financial assets (like stocks, bonds, and real estate) and direct investments between countries.