Unit 2: Measurement of Economic Performance

AP Macroeconomics

Circular Flow of Income

Model that traces aggregate flow of income and spending through the economy

GDP: Expenditures

Personal Consumption + Gross Private Domestic Investment + Government Sectors + (Exports - Imports) [C + I + G + (X - M)]

GDP: Income

Employment Compensation + Profits + Rent + Interest + Depreciation + Indirect Business Taxes

Nominal GDP

GDP calculated using current year prices

Real GDP

GDP calculated using base year prices

Included in GDP

Market transaction; goods produced in the current year; final goods and services

Excluded from GDP

Household production; illegal production; financial transactions; government transfer payments; intermediate goods; leisure time

Net Domestic Product (NDP)

GDP - Depreciation

Net Private Domestic Investment (NPI)

I - Depreciation

GNP

GDP + Net receipts of factor income from rest of the world

Net National Product (NNP)

GNP - Depreciation

National Income (NI)

NNP - Indirect Business taxes or Wages + Profit + Rent + Net Interest

Inflation

A persistent increase in the average price level of goods and services

Consumer Price Index (CPI)

Current cost of market basket/ Base period cost of market basket X 100

Implicit Price Deflator (GDP Deflator)

Nominal GDP/Real GDP X 100

Inflation Rate

Change in CPI/ Initial CPI X 100

Disinflation

Rate of inflation is going down but there is still inflation

Deflation

Decrease in price level of goods and services

Causes of Inflation

cost/push

Effects of Inflation

Unemployment

The measure of the number of people not working who are looking and available for work

Unemployment Rate

Number unemployed/ Total labor force (Employment + Unemployment) X 100

Labor Force Participation Rate

Employed + Unemployed / Population over 16

Causes of Unemployment

Cyclical, Structural, Seasonal, Frictional

Effects of Unemployment