AP Macro Unit 2 Test

Expenditure Approach

Adds up aggregate spending on domestically produced final good and services in the economy/ The sum of consumer spending, investment spending, government purchases of goods and services and exports minus imports.

Income Approach

Calculating GDP adds up the total factor income earned by households from firms,in the economy, including rent, wages, interest, and profits.

Value Added Approach

Calculating GDP by adding up their contributions to the value of a final good and services produced.

Gross Domestic Product

Total value of all goods and services produced in the economy during a given year (quarterly).

Nominal GDP

Total current year spending on final domestic goods and services

Calculating Nominal GDP

(Consumption + Investment + Gov Purchases + Exports) - Imports

Circular Flow Diagram

Labor Force

The sum of the employed and the unemployed # of people that can work.

Labor Force Participation

Percentage of the working age population that is in the labor force.

Labor Force Participation Rate

Unemployment Rate Formula

Frictional Unemployment

Voluntary job search and entry into the civilian labor force.

Structural Unemployment

Mismatch between individuals and available jobs due to economic demands, worker skills, and geographic issues.

Cyclical Unemployment

Jobless caused by economic recession = Actual unemployment rate (UR)

Marginally Attached Workers

People available for work within the last 12 months but not employed.

Inflation

Rise in the overall level of prices.

Deflation

Decrease in the overall level of prices

Disinflation

Lower level of inflation compared to previous period/ bringing down inflation rates.

Hyperinflation

Very high and accelerated rates of inflation above historical rates or normal rates.

Inflation Rate

Aggregate Price Level

Measure of overall level of prices in the economy = average price change.

Market Basket

Hypothetical set of consumer purchases of goods and services

Problems with CPI

Can overstate the rate of inflation

Consumers change purchasing choices (Substitution Bias, Good vs Inferior Goods)

Real wages

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 or deflation.

Shoe-leather costs

Attempt to invest/spend money before it loses value.

Menu Costs

Listed price v Sale price

Unit of Account Costs

The price per unit amount V the overall cost of an item. (Supposes profits when there maybe none)

Nominal GDP

GDP = C + I + G + (X - M)

GDP Per Capital

Real GDP / Population within a country.

Phases of the Business Cycle