AP Macro Unit 2 Flashcards

National income and product accounts, or national accounts

Keeps track of the flow of money among different sectors of the economy

Product markets

Where goods and services are bought and sold

Consumer spending

Household spending on goods and services

Factor markets

Where resources, especially captical and labor, are bought and sold

Government spending

Total expenditures on goods and services by federal, state, and local governments

Taxes

Required payments to the government

Tax revenue

The total amount of funds the government receives from taxes

Disposable income

Equal to income plus government transfers minus taxes, is the total amount of household income available to spend on consumption

Government transfers

Payments the government makes to individuals without expecting a good or service in return

Private savings

Equal to disposable income minus consumers spending, is a household’s disposable income that is not spent on consumption

Financial markets

Channel private savings into investment spending and government borrowing

Government borrowing

The amount of funds borrowed by the gov ernment in the financial markets

Investment spending

Spending by firms on new productive physical capital, such as machinery and structures, and on changes in inventories

Inventories

Stocks of goods and raw materials held to facilitate business operations

Exports

Goods and services sold to other countries

Imports

Goods and services purchased from other countries

Gross domestic product (GDP)

The total value of all final goods and services produced in the economy during a given year

Expenditure approach to calculating GDP

Income approach to calculating GDP

Adds up the total factor income earned by households from firms in the economy, including rent, wages, interest, and profit

Value-added approach to calculating GDP

Surveys firms and adds up their contributions to the value of final goods and services

Final goods and services

Goods and services sold to the final, or end, user

Intermediate goods and services

Goods and services bought from one firm by another firm to be used as inputs into the production of final goods and services

Net exports

The difference between the value of exports and the value of imports, denoted as X-M

Value added

The value of a producer’s sales minus the value of its purchases of inputs

Nonmarket transactions

Involve goods and services that are not bough and sold in a legal market

Employed

Currently holding a job in the economy, either full time or part time.

Unemployed people

Are actively looking for work but aren’t currently employed. They are willing and able to work.

Labor force

Equal to the sum of the employed and the unemployed. Those who are either working or are unemployed, but willing and able to work. 

Labor force participation rate

The percentage of the working age population (those aged 16 and older in the US) that is in the labor force. 

Unemployment rate

Percentage of the total number of people in the labor force who are unemployed

Discouraged workers

Nonworking people who are capable of working but have given up looking for a job due to the state of the job market

Underemployed

Workers who would like to work more hours or who are overqualified for their jobs

Frictional unemployment

Unemployment due to the time workers spend in job search. It always exists in an economy because there are always individuals actively looking for a job, and new individuals entering the labor force. More unemployment benefits increase frictional unemployment, because individuals are less incentivised to get a job.

Structural unemployment

Unemployment that results when workers lack the skills required for the available jobs, or there are more people seeking jobs in a labor market than there are jobs available at the current wage rate

Natural rate of unemployment

Unemployment that arises from the effects of frictional plus structural unemployment

Cyclical unemployment

Deviation of the actual rate of unemployment from the natural rate of unemployment. It is the unemployment that arises from the business cycle and recessions.

Inflation

The overall price level is rising

Deflation

The overall price level is falling

Price stability

When the overall price level is changing only slowly, it at all

Real wage

Wage rate divided by the price level to adjust for the effects of inflation or deflation

Real income

Income divided by the price level to adjust for the effects of inflation of deflation

Inflation rate

The percentage increase in the overall level of prices per year

Aggregate price level

Measure of the overall level of prices in the economy

Market basket

A hypothetical set of consumer purchases of goods and services

Base year

The year arbitrarily chosen for comparison when calculating a price index. The price level comparest the price of the market basket of goods in a given year to its price in the base year

Price index

Measures the cost of purchasing a given market basket in a given year. The index value is always equal to 100 in the selected base year

Consumer price index (CPI)

Measures the cost of the market basket of a typical urban american family

Substitution bias

Occus in the CPI because, over time, times with prices that have risen most receive too much weight (because households substitute away from them), while items with prices that have risen least are given too little weight (because households shift their spending toward them).

Producer price index (PPI)

Measures the prices of goods and services purchased by producers.

Shoe leather costs

The costs people spend while running around trying to spend their money before it becomes worthless (their shoes get destroyed by this)

Menu costs

Cost to update the prices of items in stores

Unit-of-Account Costs

The costs associated with the decrease in the reliability of money as a unit of exchange due to inflation. If inflation is 10%, and you made 10% profit on something, you would gain nothing but have to pay taxes on your profit. You now have a net loss.

Nominal interest rate

Interest rate actually paid for a loan

Real interest rate

The nominal interest rate minus the rate of inflation

Winners from inflation

• Borrowers

  • When they pay the loan back, the money has less purchasing power so you owe less

• Business where the price of the product increases faster than the cost of the inputs

• People in debt

  • The value of their debt decreases

Losers from Inflation

• Lenders

  • When people repay them, their repayment has lost value and they get less money back

• People with fixed incomes

  • The purchasing power of their income decreases

• Savers

  • The value of their savings decreases in purchasing power

Disinflation

The process of bringing the inflation rate down (but not negative)

Aggregate output

The total quantity of final goods and services produced within an economy

Real GDP

The total value of all final goods and services produced in the economy in a given year, calculated using the prices of a selected base year in order to remove the effects of price changes

Nominal GDP

The total value of all final goods and services produced int he economy during a given year, calculated with the prices current in the year in which the output is produced

GDP deflator

100 times the ratio of nominal GDP to real GDP in that year.

GDP deflator = (nominal GDP/real GDP) * 100

GDP per capita

GDP divided by the size of the population; it is equivalent to the average GDP per person

Business cycle

The alternation between economic downturns (recessions) and economic upturns (expansions)

Recessions

Periods of economic downturns when output and employment are falling

Trough

The lowest point of a recession, before the economyc starts to expand

Expansions/recoveries

Periods of economic upturns when output and employment are rising

Peak

The highest point of an expansion before teh economy foes into a recession

Depression

A very deep and prolonged downturn

Economic growth

An increase in the maximum amount of goods and services and economy can produce.

Full employment level of output

The level of real GDP the economy can produce when all resources are fully employed

Potential output

What an economy can produce when operating at maximum sustainable employment (natural rate of employment)

Output gap

The difference between the actual output and potential output