AP Macroeconomics Unit 2 Study Guide

GDP, Inflation, Unemployment, Business Cycle

3 macroeconomic goals of all countries

promote economic growth

limit unemployment

keep prices stable

factor payments

payments for the factors of production

• rent, wages, interest, and profit

GDP

dollar value of all final goods and services produced within a country in one year

percent change in GDP formula

year 2-year1/year 1 ×100

transactions not included in GDP

intermediate goods, nonproduction transaction, non market transactions, illegal transactions

GDP per capita

GDP divided by population, it identifies on average how many products each person makes

best way to measure standard of living

national income formula

W+R+i+Pr

w= wages

r= rent

i= interest

Pr= profit

expenditures approach formula

C+I+G+Xn

C= consumer spending

I= business investment

G= government spending

Xn= net exports

3 components of consumer spending

durable goods (washing machine)

nondurable goods (food and clothes)

services (dental work and repairs)

Inventories

goods produced and held in storage to sell later on

unemployment

people who are actively looking for a job but not working

unemployment rate

the percent of people in a labor force who want a job but aren’t working

unemployment rate formula

#unemployed/# in labor force x 100

labor force requirements

at least 16

able and willing to work

not institutionalized (in jail or hospital)

not in military, full time school, or retirement

3 types of unemployment

frictional

structural

cyclical

frictional unemployment

temporary unemployment or being in between jobs

individuals are qualified workers with transferable skills

ex. high school/college graduates looking for jobs

structural unemployment

changes in the labor force make skills obsolete

these workers do not have transferable skills and these jobs will never come back

ex. machinery replacing workers

cyclical unemployment

unemployment caused by a recession, demands for goods and services falls so labor force falls too

Natural Rate of Unemployment (NRU)

frictional plus structural unemployment

unemployment that exists when an economy is healthy and growing

Non-accelerating inflation rate of unemployment (NAIRU)

specific level of unemployment that does not cause inflation to increase

people not included in unemployment

discouraged workers (people who are no longer looking for a job)

underemployed workers

someone who wants more hours but can’t get them

still considered employed

inflation

rising general level of prices, it reduces the “purchasing power” of money

deflation

decrease in the general level of prices, or negative inflation rate

disinflatiion

prices increasing at slower rates

price indicies

index #’s assigned to each year that show how prices have changed relative to a specific year

consumer price index (CPI)

most commonly used measurement of inflation rate

CPI formula

price of market basket/price of MB in base year x 100

labor force participation rate formula

civilian labor force total/civilian non-institutionalized population x 100

rate if inflation change formula/percent change formula

new-old/old x 100

nominal GDP

GDP not adjusted for inflation

real GDP

GDP adjusted for inflation

people who are hurt by unanticipated inflation

lenders

savers

people who are helped by unanticipated inflation

borrowers

businesses where price of product increases faster than the cost of the resource

costs of inflation

menu costs (costs money to change listed prices)

shoe leather costs (cost of transactions increase)

unit of account costs (money doesn’t reliably measure the value of goods/services)

GDP deflator

the measure of the prices of all goods produced

only goods and services produced domestically

GDP deflator formula

nominal GDP/real GDP x 100

nominal GDP formula

GDP deflator x real GDP/100

real GDP formula

nominal GDP/GDP deflator x 100