Ap Macro u2: economic indicators

Business Cycle

The fluctuations of real GDP over time, showing periods of growth and contraction

Full Employment

Occurs at about 5% unemployment; economy is at max sustainable capacity

GDP Growth Formula

% Change = (Year 2 - Year 1) ÷ Year 1 × 100

Income Approach to GDP

Adds all income earned: GDP = wages + rent + interest + profit

Expenditure Approach to GDP

Adds all spending: GDP = C + I + G + Xn

Consumer Spending (C)

70% of U.S. GDP; purchases of goods/services by households

Investment (I)

10% of U.S. GDP; business spending on tools and equipment

Government Spending (G)

20% of U.S. GDP; includes schools, tanks, roads, but not transfer payments

Net Exports (Xn)

Exports minus imports; can be negative if imports > exports

Not Counted in GDP

Intermediate goods, non-production transactions (stocks, bonds, real estate, used goods), and non-market/illegal activity

Nominal GDP

GDP measured in current prices; does not adjust for inflation

Real GDP

GDP adjusted for inflation; expressed in constant dollars

GDP Deflator

Price index that converts nominal GDP into real GDP: (Nominal ÷ Real) × 100

Consumer Price Index (CPI)

Price index that tracks the cost of a fixed market basket of goods and services

Inflation

General rise in prices, reducing purchasing power of money

Inflation Rate Formula

% Change in Prices = (Year 2 CPI - Year 1 CPI) ÷ Year 1 CPI × 100

Adjusting Prices for Inflation

Price in earlier year × (Price Index today ÷ Price Index earlier year) = Price in today’s dollars

Fisher Equation

Nominal interest rate = Real interest rate + Inflation

Quantity Theory of Money

M × V = P × Y; money supply × velocity = price level × output

Demand-Pull Inflation

Excessive demand pulls up prices (“too many dollars chasing too few goods”)

Cost-Push Inflation

Rising production costs push up prices; often causes stagflation

CPI vs GDP Deflator

CPI measures prices of consumer goods (including imports); GDP deflator measures all domestically produced goods

Problems with CPI

Substitution bias, new products, and product quality changes distort accuracy

Winners from Inflation

Borrowers with fixed-rate loans, debtors, businesses where prices rise faster than costs

Losers from Inflation

Lenders at fixed interest rates, people on fixed incomes, savers

Unemployment

The % of people in the labor force who want a job but are not working

Unemployment Rate Formula

(# unemployed ÷ labor force) × 100

Frictional Unemployment

Temporary unemployment or being between jobs; workers have transferable skills

Structural Unemployment

Caused by changes in the economy that make some skills obsolete; workers must retrain

Cyclical Unemployment

Caused by downturns in the business cycle (recessions); demand for labor falls

Natural Rate of Unemployment (NRU)

Unemployment that includes only frictional and structural unemployment

Labor Force

People 16+ willing and able to work, not institutionalized, not in military/full-time school/retired

Labor Force Participation Rate

(Labor force ÷ Work-eligible population) × 100

Good Economy Benchmarks

Unemployment 6% or less, inflation 1–4%, GDP growth 2.5–5%

Phillips Curve

Shows short-run tradeoff between inflation and unemployment

Short-Run Phillips Curve

Low unemployment comes with higher inflation; high unemployment comes with lower inflation

Long-Run Phillips Curve

Vertical at the NRU; no tradeoff between inflation and unemployment in the long run