AP Macro Econ Unit 2

Gross Domestic Product

The total dollar value of all final goods and services produced within the borders of a country during a specific time period, usually one year.

final good

a new good that undergoes no further processing before it is sold to consumers (Counted in GDP)

intermediate good

good purchased for resale or for use in producing another good (not counted in GDP)

circular flow

a model of the movements of goods, services, resources, and money in an economy

product market

market where producers offer goods and services for sale to households, other businesses, and the government

resource market

a market in which households sell and firms buy resources (land, labor, capital, entrepreneurship)

consumption

spending by households on goods and services, with the exception of purchases of new housing

investment

business spending on capital equipment, inventories, and structures and household purchases of new housing

net exports

spending on domestically produced goods by foreigners (exports) minus spending on foreign goods by domestic residents (imports)

Expenditure approach

calculating GDP by adding up spending on all final goods & services produced in the nation during the year (Consumer Spending (C) + Investment (I) + Government Spending (G) + Net Exports (Xn)

GDP per capita

total value of goods and services produced in a year divided by the population

Real GDP

GDP after adjustments for inflation

Nominal GDP

the GDP measured in terms of the price level at the time of measurement (unadjusted for inflation)

Inflation

an increase in the overall level of prices in the economy

demand pull inflation

increases in the price level resulting from an excess of demand over output

cost push inflation

Increases in the price level due to a rise in the cost of production.

real interest

The rate of interest adjusted for inflation. (Nominal interest rate - inflation rate)

nominal interest rate

the stated interest rate on a loan

unemployment rate

the percentage of people in the civilian labor force who are not working but are looking for jobs

structural unemployment

unemployment that occurs when workers skills do not match the jobs that are available

frictional unemployment

unemployment caused by workers changing jobs or waiting to go to new ones

cyclical unemployment

unemployment that rises during economic downturns and falls when the economy improves

natural rate of unemployment

The "normal" unemployment rate due to frictional and structural conditions in labor markets. It is the unemployment rate that occurs even when the economy is operating at a maximum sustainable rate of output.

Okun's law

for every 1% of unemployment above the natural rate a negative GDP gap of 2% occurs

Business Cycle

recurring fluctuations in economic activity consisting of recession and recovery and growth and decline

Expansion

a period of economic growth as measured by a rise in real GDP and fall in the unemployment rate

Peak

the height of an economic expansion, when real GDP stops rising and the unemployment rate is at its natural rate

Contraction

A period of economic decline marked by falling real GDP and rising unemployment

recession

two or more consecutive quarters of decline in Real GDP

trough

the lowest point in an economic contraction, when real GDP stops falling and unemployment rates are high

recovery

the phase in which unemployment begins to decrease, demand for goods and services increases, and GDP begins to rise again

(𝑅𝑒𝑎𝑙 𝐺𝐷𝑃)/𝑃𝑜𝑝𝑢𝑙𝑎𝑡𝑖𝑜𝑛

how to calculate: 𝑃𝑒𝑟 𝐶𝑎𝑝𝑖𝑡𝑎 𝐺𝐷𝑃

unemployment rate = # of unemployment/ labor force X 100

How to calculate unemployment rate

= P2 -P1/ P1 * 100 OR Y2 - Y1/ Y1 *100

rate of inflation calculation

CPI (Consumer Price Index)

market basket of goods and services; used for payments made of half of population

Quantity Theory of Money Equation

MV=PY

where M=$, V=Velocity, P=Price level, Y=quantity/output

The Wage-Price Spiral

1. A perpetual Process

2. Workers demand raises b/s prices too high >> businesses increase wages but to attain profit they increase prices >> workers demand higher wages etc.

COLA

Cost Of Living Adjustment. gov programs, safety net to keep up w/ inflation

Hyperinflation

extreme out of control inflation. Increasing to a point where measuring inflation is pointless