AP Macro Unit 2

Define Macro

study of the large economy as a whole

Factor Payments

Rent, Wage, Profit, Interest

Transfer Payments

welfare, social security

The 3 economic goals of a country

1) Promote economic growth (GDP) - 2-6%

2) Limit unemployment - 4-6%

3) Limit inflation - 2%

GDP

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

GDP/Capita

identifies on average how many products each person makes

What is not included in GDP?

1) intermediate goods

2) non production transactions (stocks, bonds, real estate)

3) used goods

4) nonmarket/illegal activities

Expenditures Approach

C + I + G + (X - M)

Income Approach

Add up all the income earned from selling all final goods and services produced in a given year

Value - Added Approach

add up all the dollar value added @ each stage of production process

Define Unemployment

workers that aren't working but are actively looking for a job

Unemployment rate formula

#unemployed/#labor force x 100

Who is counted in the labor force?

1) at least 16

2) non institutionalized

3) not in military, full time school, or retired

4) able and willing to work

Frictional Unemployment

Always Exists: temporary unemployment or between jobs

Seasonal unemployment

Structural Unemployment

Always Exists: changes in the labor force makes some skills non transferrable

Technological unemployment

Cyclical unemployment

unemployment caused by a recession

Natrual Rate of Unemployment

Frictional + Structrual unemployment

amount of Unemployment that exists when the economy is healthy and growing

When is an economy at full employment?

When there is frictional and structural unemployment but not cyclical unemployment

How would an increase in discouraged workers affect the labor force participation rate?

Less labor force participation rate because an increase in discouraged workers means less people are willing and able to work

Define Inflation

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

What affect does inflation have on the economy?

Inflation decreases investments and GDP

Define Deflation

decrease in general prices / negative inflation rate

What affect does deflation have on the economy?

decreases consumer spending and GDP

CPI formula

Price of the market basket / price of the market basket in the base year

Who is hurt by inflation?

1) Lenders who lend money at a fixed rate

2) people with a fixed income

3) savers

Who is helped by inflation?

1) Borrowers

2) A business where the price of the product increases faster than the price of resources

Nominal wage

wage measured by current dollars

Real wage

wage adjusted for inflation

Nominal GDP

measured in current prices. does not account for inflation from year to year

Real GDP

expressed in constant, or unchanging dollars. Adjusts for inflation.

CPI v.s. GDP Deflator

the Deflator measures the prices of all goods produces

the CPI measures the prices of only the goods and services bought by consumers

GDP deflator formula?

nominal / real * 100

in increase in the price of good bought by firms will be accounted for in the ____ but not in the ____

deflator, CPI