AP Macroeconomics Business Cycle

Gross Domestic Product (GDP)

The total market value of all final goods and services produced within a country in a specific time period; for example, the value of new cars, restaurant meals, and haircuts produced in the U.S. during one year counts toward GDP.

Final Good

A product or service bought by the final user, not used to make another product; for example, a pizza bought for dinner is a final good.

Net Exports

The value of exports minus the value of imports; for example, if a country exports $200 billion but imports $250 billion, it has net exports of negative $50 billion.

Intermediate Goods

Products used to produce another good or service; for example, cheese bought by a restaurant to make pizza

Nominal GDP

GDP measured with current-year prices, so it can change because of prices or output; for example, nominal GDP rises if laptop prices increase even when the same number of laptops is made.

Price Index

A measure showing how prices have changed compared with a base year; for example, an index rising from 100 to 110 means average prices rose 10 percent.

Consumer Price Index (CPI)

A measure of the average price changes consumers pay for a typical basket of goods and services; for example, CPI rises when common costs such as rent, groceries, and gasoline increase.

GDP Deflator

A price index that tracks prices for all final goods and services produced domestically; for example, it rises when nominal GDP grows faster than real GDP because prices are increasing.

Real GDP

GDP adjusted for price changes, showing how much actual production changes; for example, real GDP rises when factories produce more goods, even if prices stay the same.

Multiple Counting

Incorrectly counting both intermediate goods and final goods in GDP, which makes total production seem larger than it is; for example, counting flour sold to a bakery and the bread sold to customers separately

Nonmarket Transactions

Economic activities without a market payment, which are generally excluded from GDP; for example, babysitting a younger sibling for free

Factor Market

A market where households sell resources, such as labor, land, capital, or entrepreneurship, to firms; for example, a worker provides labor to a store in exchange for wages.

Product Market

A market where firms sell goods and services to households; for example, buying a phone from a retailer occurs in the product market.

Economic Expansion

A period of increasing real GDP, production, employment, and spending; for example, a growing restaurant hires more workers because customer demand increases.

Peak

The highest point of an expansion before economic activity starts to decline; for example, the peak occurs when output stops growing and then begins to fall.

Economic Contraction

A period when real GDP and economic activity decrease; for example, businesses may reduce production and lay off workers when sales fall.

Trough

The lowest point of a contraction before the economy starts growing again; for example, occurs when job losses stop worsening and production begins to recover.

Full-Employment Output

The level of output produced when resources are used efficiently and unemployment is at its natural rate; for example, some people can be between jobs while the economy is still at full employment.

Potential Output

The greatest sustainable amount of real GDP an economy can produce with its workers, capital, and technology; for example, new factories and improved technology can raise potential output.

Recession

A significant decline in economic activity, including falling output and rising unemployment; for example, consumer spending falls, businesses sell less, and firms begin laying off workers, must last at least 2 quarters

Depression

A very severe, long-lasting recession with widespread unemployment and a major drop in output; for example, the Great Depression caused enormous job losses and reduced production in the 1930s.