AP MACROECNOMICS UNIT 2

Gross Domestic Product (GDP)

the total monetary value of all final goods and services produced within a country's borders in a specific time period, usually measured annually or quarterly

Consumption

Household spending on goods and services

Investment

Businesses spending on equipment and supplies to run their business

Government

Government spending on public goods and services

Net exports (X-M)

Value of all exported goods (X) and services minus the values of all imported (M) goods and services

Intermediate goods

Goods used to produce final goods

Nonproduction transactions

Financial transactions-transfer payments, stocks, bonds, real estate (nothing produced)

Nonmarket transaction

•Illegal transaction-drug sale, trafficking

•Unreported transactions-working under the table, doing the work yourself

Y = total ___________ - the value of _____________ inputs

sales; intermediate

Sums the "___________________" at each stage of production

vale added

Examples of the value/added approach to calculating GDP

•Flour would be an intermediate input and bread the final product

•An architect's service would be an intermediate input and the building the final product

Every dollar spent is a dollar earned so. . .

EXPENDITURE APPROACH = INCOME APPROACH = VALUE ADDED APPROACH

Factors determining productivity

economic system, property rights, capital stock, human capital, and natural resources

What is the best measure of a nations standard of living?

GDP per capita

To be officially included in the labor force, a person must be

•at least 16 years old

•able and willing to work

•not institutionalized

•not in the military, a full-time student, or retired

According to the Bureau of Labor Statistics (BLS) a person is considered unemployed when?

if they are able for work but not currently employed and have actively sought work within the past four weeks

Frictional unemployment definition

temporary/between jobs individuals are qualified workers with transferable skills

Frictional unemployment example

•individuals looking for a better job

•graduates looking for a first job

•seasonal unemployment

Structural unemployment definition

•change in the economy make skills obsolete

•"creative destruction"

Structural unemployment example

•technological unemployment (VCR repairmen, milkmen)

Cyclical unemployment definition

caused by a recession because as demand for goods and services falls, demand for labor falls and workers are fired

Cyclical unemployment example

•high unemployment during the Great Depression

•steel workers laid off during recession

Natural rate of unemployment

the unemployment rate where there is no cyclical unemployment, aka full employment

Unemployment rate can be misleading because it does not consider the following. . .

•Discourage workers: people who have given up looking for work

•Underemployed workers: people who want more hours but can't get them are still considered employed

Calculate the gross domestic product if

consumer spending = $1000

investment spending = $200

government spending = $500

imports = $75

exports = $50

transfer payments = $50

Y= $1000 + $200 + $500 + ($50-$75)

Y = 1, 675

Graceland's GDP in 2014 was $4000 and in 2015 was $5000

1. What is the % change in GDP from 2014 to 2015?

2. What is the % change in GDP from 2015 to 2014?

1. 25%

2. -20%

Emmavania's GDP in 2014 was $2000 and in 2015 was $2100

1. What is the % change in GDP from 2014 to 2015?

2. What is the % change in GDP from 2015 to 2014?

1. 5%

2. -5%

If GDP in Year 1 is $14000 and Year 2 it increases by $1000. What is the percent change in GDP from year 1 to year 2?

7%

GDP increases by 3% from year 1 to year 2. The GDP in year 1 was $250 billion. What is GDP in year 2?

257.5 billion

Match the following. . .

Event:

A) an increase in government spending

B) a major job-search website crashes and remains offline for 6 months

C) contractionary monetary policy by the Fed

D) a decrease in the minimum wage

Impact on unemployment:

1) increase in the natural rate of unemployment

2) decrease in the natural rate of unemployment

3) increase in existing cyclical unemployment

4) decrease in existing cyclical unemployment

A = 4

B = 1

C = 3

D = 2

In May there are 6000 people classified as unemployed, the labor force is 80000 people and the total working age population is 100,000 people. Between May and June two events take place: 1000 graduates join the labor force and start looking for working and 1000 workers retire. Calculate the following. . .

a. The labor force participation rate in May

b. The labor force participation in June

c. The unemployment rate in May

d. The unemployment rate in June

a. 80%

b. 80%

c. 7.5%

d. 8.75%

The cyclical unemployment rate is 3%, the structural unemployment is 3%, and the frictional unemployment is 1%

a. calculate the natural rate of unemployment

b. calculate the actual rate of unemployment

a. 4%

b. 7%

Inflation

the rate at which the general level of prices for goods and services rises, eroding purchasing power

The government tracks the prices of specific "_____________________" that included the same goods and services

market baskets

Inflation rate

percent change in prices from year to year

Price indices

show how prices have changed relative to a specific base year

Problems with CPI and Results (MATCH). . .

Problems

A) substitution bias means consumers may be buying cheaper substitutes that may not be part of of the market basket

B) It may not include the newest consumer products

C) It ignores changes in product quality

Results

1) CPI may suggest that prices haven't changed even though the economic well-being has improved significantly

2) CPI may be higher than what consumers are really paying

3) CPI measures prices but not increase in product choices

A = 2

B = 3

C = 1

Quantity theory

the government prints TOO much money which means there are just more dollars chasing the same about of goods and services, this can lead to hyperinflation

Demand-pull

an increase in overall demand pulls up prices

Cost-push

higher production costs push prices up, its usually caused by a negative supply shock

Wage-price

the perpetual process of workers demanding raises which forces employers to increase prices to pay the higher wages which forces workers to demand higher wages

Hurt by inflations

•lenders

•people with fixed incomes

•savers

Helped by inflation

•borrowers

•any business where the price of the product increases faster than the price of resources

Nominal wages

refer to the actual dollar amount an employee is paid, without adjusting for inflation or changes in the cost of living

Real wages

nominal wages adjusted for inflation, providing a measure of the purchasing power of an employee's earnings

Deflation

impacts consumer behavior by leading people to delay purchases, expecting prices to drop further

Why is deflation bad?

People heard money which decreases consumer spending and GDP

Disinflation

affects consumer purchasing power by slowing down the rate at which increases

Jack retired 5 years ago and now lives o a fixed-income annuity and a small savings account that pays him 1% interest on the balance, The current inflation rate is 1.7%

Hurt

Leia just read that the national debt owed by the federal government is at an all-time high.

Helped

Nominal GDP

refers to the total market value of all final goods and services produced within a country in a given time period , measured using current prices, and it does NOT account for inflation

Real GDP

the total value of all final goods and services produced in the economy during a given year, calculated using the prices of a selected base year, and it DOES account for inflation

GDP deflator

measures the prices of all good, whereas the CPI measures of prices only the goods and services bought by consumers

You got a job in 2020 with a salary of $25,000. In 2022, you receive a $2000 increase in your salary. CPI in 2022 is 108 with a base year in 2020.

A) Calculate your real income in 2020

B) Calculate your real income in 2022

C) Calculate the percentage in your real income

D) Calculate the percentage change in your nominal income

A) $25,000

B) $25,000

C) 0%

D) 8%

Business cycle

refers to the fluctuations in economic activity that an economy experiences over time, consisting of expansions and contractions

Expansion phase

characterized by increasing GDP, low unemployment, and rising consumer confidence

Peak

marks the highest point of the expansion phase, where economic activity reaches its maximum level

Contraction phase (recession)

occurs when economic activity declines, GDP falls, unemployment rises, and consumer confidence decreases

Trough

represents the lowest point of the contraction phase, where economic activity reaches its minimum level

Recovery phase

begins after the trough, as economic activity starts to increase again, leading to a new expansion phase

Policymakers (governments and central banks)

attempt to smooth out the business cycle by implementing fiscal and monetary policies to stimulate the economy during recessions and control inflation during expansions