AP MACRO FLASHCARDS

Factor Payments

Payment for the factors of production, namely rent, wages, interest, and profit.

Transfer Payments

When the government redistributes income (ex: welfare, social security).

Subsidies

Government payments to businesses.

Gross Domestic Product (GDP)

The dollar value of all final goods and services produced within a country in one year.

% Change in GDP

Year 2 - Year 1 / Year 1 X 100

GDP Per Capita (Per person)

GDP divided by the population. It identifies on average how many products each person makes.

Economic System

Capitalism promotes innovation and provides incentives to improve productivity. (Explains why 1 country has higher GDP than another)

Rule of Law

Countries with solid institutions and political stability have historically had more economic growth. (Explains why 1 country has higher GDP than another)

Capital Stock

Countries that have more machines and tools are more productive. (Explains why 1 country has higher GDP than another)

Human Capital

Countries that have better education and training are more productive. (Explains why 1 country has higher GDP than another)

Natural Resources

In general, countries that have access to more natural resources are more productive. (Explains why 1 country has higher GDP than another)

What is NOT included in GDP

Intermediate Goods, Non Production Transactions, and Nonmarket and Illegal Activities

Expenditures Approach

Add up all the spending on final goods and services produced in a given year.

Income Approach

Add up all the income earned from selling all final goods and services produced in a given year. For the Income Approach - ADD FACTOR PAYMENTS.

Value-added Approach

Add up the dollar value added at each stage of the production process.

Consumer Price Index (CPI)

Price of market basket / Price of market basket in base year X 100.

Inflation rate

New CPI - Old CPI / Old CPI X 100.

What GDP doesn’t measure

PIES → Population, Inequalities, Environment, Shadow Market.

Unemployment

Workers that are actively looking for a job but aren’t working.

The Unemployment Rate

The percent of people in the labor force who want a job but are not working.

Unemployment rate

= (Number of unemployed / Number in Labor Force) X 100.

Frictional unemployment

Temporary unemployment or being between jobs. Individuals are qualified workers with transferable skills.

Structural Unemployment

Changes in the labor force make some skills obsolete. These workers DO NOT have transferable skills and these jobs will never come back. Workers must learn new skills to get a job.

Cyclical Unemployment

Unemployment caused by business cycles (recessionary). As demand for goods and services falls, demand for labor falls and workers are laid off. This is sometimes called “demand deficient unemployment.”

Natural Rate of Unemployment (NRU)

Frictional plus structural unemployment. The amount of unemployment that exists when the economy is healthy and growing.

Full Employment Output (Y)

The Real GDP created when there is no cyclical unemployment.

People who are hurt by Inflation

Lenders, People with fixed incomes - retirees, and Savers.

People who are helped by Inflation

Borrowers and businesses where the price of the product increases faster than the price of resources.

Nominal Wage

Wage measured by dollars rather than purchasing power.

Real Wage

Wage adjusted for inflation.

Costs of inflation

Menu Costs, Shoe Leather Costs, and Unit of Account costs.

Menu Costs

Costs money to change listed prices.

Shoe Leather Costs

The costs of transactions increase.

Unit of Account Costs

Costs that arise from the unpredictable value of money.

Hyperinflation

When a country experiences very high and accelerating inflation, leading to a rapid erosion of the real value of its currency.

Nominal GDP

GDP measured in current prices. It does not account for inflation from year to year.

Real GDP

GDP expressed in constant, or unchanging, dollars. Real GDP adjusts for inflation.