AP Macroeconomics Ultimate Guide Flashcards

Economics

the study of how people, firms, and societies use their scarce productive resources to best satisfy their unlimited material wants

Scarcity

all factors of production are scarce; therefore, the production of goods and service are also scarce

Macroeconomics

consider the big picture- the nation’s economy as a whole

Microeconomics

individuals in an economy while keeping the overall economy in mind

Labor

human effort and talent, physical and mental. ex. education and training (human capital)

Land and Natural Resources

any resource created by nature

Physical Capital

human-made equipment like machinery as well as buildings, roads, vehicles, and computers

Entrepreneurial Ability

the effort and know-how to put the other resources together in a productive venture

Traditional Economy

tied to the evolution of economics, and it is related to subsistence and tribal life

Command Economy

consists of the central planning of the economy which differed in different regions of the world depending on the political regime

Market Economy

where buyers and sellers perform transactions. built around Laissez Faire ("free market") philosophy

Mixed Economy

a mix of command and market structure→ government plays a role in organizing the economy to some degree

Opportunity Cost

the value of what was given up

Production Possibilities Curve

simplified model of an individual, or a nation, that can choose to allocate its scarce resources between the production of two goods or services

What does the slope of the curve measure in an PPC curve?

opportunity cost of the good on the x-axis

What does the inverse slope of the curve measure in an PPC curve?

opportunity cost of the good on the y-axis

Productive Efficency

when the economy is producing the maximum output for a given level of technology and resources

Allocative Efficency

the economy is producing the optimal mix of goods and services

Optimal Allocative Efficiency

the combination of goods and services that provides the most net benefit to society

Market Failure

when a market fails to produce the allocative efficient quantity

Economic Growth

the ability to produce a larger total output over time

Economic Contraction

when a country's economy shrinks due to factors such as reduced spending by consumers, businesses, or the government

Absolute Advantage

producing goods/services more efficiently, using fewer inputs

Comparative Advantage

this principle is the basis for showing how nations can gain from free trade

Terms of Trade

the country’s export prices to income prices and determines the relative price between the nation’s exports and imports

Law of Demand

holding all else equal, when the price of good rises, consumers decrease the quantity demanded of that good

Ceteris Paribus

to predict how a change in one variable affects a second, we hold all other variables constant

Acronym of Determinants of Demand

INSECT:
I - Income
N - Number of Buyers/Consumers
S - Substitutes
E - Expectations of Future Prices
C - Completements
T - Taste and Preferences

Supply

the different quantities of goods and services that are willing to produce at various price levels

Law of Supply

holding all else equal, when the price of good rises, the quantity of good supplied increases

Quantity Supplied

the amount of a good or service that is produced at a particular price level (one point)

Demand Line

the entire line with all of the points that make it up

Determinants of Supply Acronym

R- Resources
O - Other good prices
T - Taxes
T - Technology
E - Supplier Expectations
N - Number of Competitors

Market Equilibrium Price

price that the market sets, where buyers buy the exact amount which the sellers are willing to produce

Market Disequilibrium

occurs when shortage or suplus in the market

Market Shortage (Excess Demand)

when the quantity demanded exceeds the quantity supplied → prices rise to eliminate shortage

Market Surplus (Excess Supply)

when the quantity supplied exceeds the quantity demanded → prices fall to eliminate surplus

Circular Flow of Economic Activity

a model that shows how households and firms circulate resources, goods, and incomes through the economy, and also includes government and banks

Closed Economy

a circular flow model that assumes there is no foreign sector (imports and exports).

Circular Flow Model: Consumer

the people who buy the goods/services in an economy and provide labor and receive wages/income from the factor market

Circular Flow Model: Firms

any business that produces goods and supplies them to the product market and then receives the payment for those goods and receive factors of production from the factor market and then pay them with wages

Circular Flow Model: Product Market

an exchange of goods and services for money between firms and households

Circular Flow Model: Factor Market

where factors of production such as labor, capital, and land are bought and sold

Gross Domestic Product (GDP)

the market value of the final goods and services produced within a nation in a given period

Aggregate Spending (GDP)

the sum of all spending from four sectors of the economy. GDP = C + I + G + (X – M)

Aggregate Spending: Consumer Spending

spending done by customers

Aggregate Spending: Investment Spending

current spending to increase output or productivity later

• New capital machinery purchased by firms.

• New construction for firms or consumers.

• The market value of the change in unsold inventories.

Aggregate Spending: Government Spending

purchases made by the government for final goods and services and investments in infrastructure

Aggregate Spending: Net Exports

Exports → X, Imports → M

Aggregate Income (AI)

the sum of all income—Wages + Rent + Interest + Profit—earned by suppliers of resources in the economy

Value-Added Approach

a third approach to calculating GDP that considers all stages of production of a final good and the value that was added to the final good along the way

What is not included in GDP?

Illegal Activities:

Unpaid work

Transfer payments

Intermediate goods

Depreciation

What are the 5 uses of GDP in economics?

1. measuring economic growth

2. comparing living standards

3. assessing business cycles

4. formulating economic policies

5. attracting foreign investment

What are the 4 limitations of GDP?

1. Differing Populations

2. Inequality

3. Environment

4. Shadow/Black Economy

Employed

if a person has worked for pay at least one hour per week

Unemployed

if a person is not currently working but are actively seeking work

Labor Force

sum of all individuals 16 years and older who are either currently employed (E) or unemployed (U). LF = E + U

Out of the Labor FOrce

A person is classified as out of the labor force if they have chosen to not seek employment

Labor Force Participation

the ratio of the size of the labor force to the size of the population 16 years and older. LFPR = (LF/Pop)*100

Unemployment Rate

the percentage of the labor force that falls into the unemployed category. Sometimes called the jobless rate. UR = 100 × U/LF

Discouraged Workers

citizens who have been without work for so long that they become tired of looking for work and drop out of the labor force

Frictional Unemployment

a type of unemployment that occurs when someone new enters the labor market or switches jobs

Seasonal Unemployment

a type of unemployment that is periodic, predictable, and follows the calendar

Structural Unemployment

a type of unemployment that is the result of fundamental, underlying changes in the economy such that some job skills are no longer in demand

Cyclical Unemployment

a type of unemployment that rises and falls within the business cycle

Full Employment

when the economy is experiencing no cyclical unemployment

Natural Rate of Unemployment

unemployment rate associated with full employment, somewhere between 4 to 6 percent in the United States

Consumer Price Index (CPI)

the price index that measures the average price level of the items in the base year market basket. This is the main measure of consumer inflation

Deflation

the general decrease in prices

Inflation

general increase in prices

Disinflation

a decrease in the rate of inflation

Inflation Rate

the percent change in aggregate price level across an entire economy in a year

Market Basket

a collection of goods and services used to represent what is consumed in the economy

The Annual Rate of Inflation on Goods Consumed by the Typical Consumer

the percentage change in the CPI from one year to the next.

GDP Deflator

includes all items that make up domestic products

Nominal Income

today’s income is measured in today’s dollars. These are dollars unadjusted by inflation

Real Income

today’s income is measured in base year dollars. These inflation-adjusted dollars can be compared from year to year to determine whether purchasing power has increased or decreased

CPI Difficulties: Consumer Substitute

as the price of goods begins to rise, consumers seek substitutes → base year market basket a poor representation of the current consumption pattern

CPI Difficulties: Goods Evolve

the emergence of new products (smartphones) and the extinction of others (manual typewriters) is understood by firms and consumers, but the market basket must reflect this or it risks becoming irrelevant.

CPI Difficulties: Quality Differences

some price increases are the result of improvements in quality. Prices that increase because the product is fundamentally better are not an indication of overall inflation → overstated CPI

Real Rate of Interest

the percentage increase in purchasing power that a borrower pays a lender

Costs of Inflation: Menu Costs

results from firms having to change prices

Costs of Inflation: Shoe-leather costs

refers to the time and effort that people end up spending to counterattack the effects of inflation

Costs of Inflation: Loss of Purchasing Power

when inflation causes the value of the individual dollar to decrease over time

Costs of Inflation: Wealth Distribution

involves the real value of wealth being transferred from one group to another

Nominal GDP

the value of current production at the current prices

Real GDP

the value of current production but using prices from a fixed point in time

Price Index

a measure of the average level of prices in a market basket for a given year, when compared to the prices in a reference (or base) year

The Business Cycle

the periodic rise and fall in 4 phases present in economic activity. Can be measured by changes in real GDP

Business Cycle: Expansion

a period where real GDP is rising

Business Cycle: Peak

the top of a business cycle where expansion has ended

Business Cycle: Contraction

a period where real GDP is falling

Business Cycle: Recession

unofficially defined as two consecutive quarters of falling real GDP

Business Cycle: Depression

a prolonged, deep contraction in the business cycle

Business Cycle: Trough

the bottom of the cycle where a contraction has stopped

Aggregate Demand (AD)

the inverse relationship between all spending on domestic output and the aggregate price level of that output

What does aggregate demand measure?

the sum of consumption spending by households, investment spending by firms, government purchases of goods and services, and net exports (exports minus imports)

What are the 3 general groups of substitutes for national output?

Foreign sector substitution effect, interest rate effect, and wealth effect

Foreign Sector Substitution Effect

when goods and services produced in other nations are more appealing due to domestic inflation → brings real GDP down

Interest Rate Effect

wait-and-see mentality for goods and services in the future as prices rise and real GDP falls