AP Macro Unit 2 Vocab

Households

A person/group of people who share an income. Sell factors and buy goods. Consumers/consumer spending. Most income in the form of wages.

Firms

Buy factors and sell goods.

Factors of Production

Used to make goods. Sold by households and bought by firms.

Goods and Services

Made out of factors. Sold by firms and bought by households.

Product Markets

Where goods and services are bought and sold.

Factor Markets

Where resources, especially capital and labor, are bought and sold.

Circular Flow Model

Traces money and goods through simplified economic model. Money flows counterclockwise. Households on top, firms on bottom. Product markets on left, factor markets on right.

Gross Domestic Product

The total value of all final goods and services produced in the economy during a given year. In US, typically counted as aggregate spending on final goods/services produced in the economy in the year.

Private Savings

Disposable income not used in consumption.

GDP Equation

GDP = C+ I + G + Xn

Consumer Spending

Household spending on goods (durable and nondurable) and services.

Investment Spending

-All final purchases of machines, equipment, and tools by businesses.

-All construction.

-Changes to business inventories.

Government Spending

-Spending by all levels of government.

-All direct purchases of resources (including labor).

Net Exports

Exports (X) - Imports (IM). Spending on all goods produced in the country minus domestic spending on all goods produced in other countries.

Intermediate Goods and Services

Goods and services bought from one firm by another to be used as inputs into the production of final goods and services.

Not Included in Calculating GDP

- Inputs.

- Intermediate goods and services.

-Used goods.

-Stocks and bonds.

-Foreign-produced goods and services.

-Transfer payments.

Disposable Income

The total amount of household income available to spend on consumption and to save. Equal to income plus government transfers minus taxes.

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. Adjusts for inflation.

Nominal GDP

The total value of all final goods and services produced in the economy during a given year, calculated with the prices current in the year in which the output is produced. Doesn't adjust for inflation.

Labor Force Participation Rate

(Labor force) / (Population age 16+) x 100

Employment

the number of people currently employed in the economy

Unemployed

Actively looking for work but aren't currently employed.

Unemployment Rate

(Number of unemployed workers) / (Labor force) x 100

Labor Force

Sum of unemployed and employed.

Discouraged Workers

Non working people who are capable of working but have given up looking for a job due to the state of the job market. Not considered unemployed.

Marginally Attached Workers

Would like to be employed and have looked for a job in the recent past but aren't currently looking for work. Different than discouraged because they just stopped looking. Not considered unemployed.

Underemployed

People who work part time because they cannot find full time work. They may also be overqualified or cannot find a pay rate they want. Not considered unemployed.

Relationship Between Unemployment Rates and Economic Conditions

If economy grows, unemployment decreases. If economy goes into a recession, unemployment increases.

Frictional Unemployment

Unemployment due to the time workers spend in job search.

Structural Unemployment

Unemployment that results when there are more people seeking jobs in a labor market than there are jobs available at the current wage rate. Due to shortages of jobs in certain areas that don't match laborer's qualifications, wage rate (efficiency and minimum), or government policies.

Natural Rate of Unemployment

The unemployment rate that arises from the effects of frictional plus structural unemployment.

Cyclical Unemployment

The deviation of the actual rate of unemployment from the natural rate. Occurs during an economic downturn.

Efficiency Wages

Wages that employers set above the equilibrium wage rate as an incentive for better employee performance. Similarly to minimum wage, drives up unemployment.

Actual Rate of Unemployment

Natural rate + cyclical rate = Total rate of unemployment.

Shoe-Leather Costs

The increased cost of transactions caused by inflation. More transactions occur because the opportunity cost of holding money increases. Ex: Money wasted on gas, time wasted spending

Mean Costs

Real costs of changing listed prices to adjust for new, inflation caused prices. Ex: time spent printing and relabeling goods.

Unit-Of-Account Costs

Arise from the way inflation makes money a less reliable unit of measurement.Uncertainty in how money is spent on resources because of how inflation causes price level to change, leading to inefficient decisions.

Inflation

An increase in price level.

Deflation

A decrease in price level.

Disinflation

A slowing of the inflation rate.

Hyperinflation

Extremely high and dangerously out of control inflation.

Nominal Interest Rates

Interest rate actually paid for a loan.

Real Interest Rate

Nominal interest rate minus rate of inflation

Consumer Price Index

Most commonly used method of measuring inflation in US.

(Cost of market basket in a given year) / (Cost of market basket in base year) x 100 = Price index of a given

year

Market Basket

A hypothetical set of consumer purchases of goods and services.

Inflation Rate Formula

(Price index in year 2 - price index in year 1) / (Price index in year 1) x 100

Nominal vs. Real Wages

Nominal is the amount paid, and real adjusts for inflation.

Effects of Recession

Real GDP decreases and unemployment increases.

Business Cycle

the short-run alteration between economic downturns, known as recessions, and economic upturns, known as expansions

Depression

a very deep and prolonged downturn

Recession

periods of economic downturns when output and employment are falling

Expansions (Recoveries)

periods of economic upturns when output and employment are rising

Output

the quantity of goods and services produced

Aggregate Output

the economy's total production of good and services for a given time period

Price Stability

when the aggregate price level is changing slowly

Economic Growth

an increase in the maximum amount of goods and services an economy can produce

Model

a simplified representation used to better understand a real-life situation

Peak

the highest point between the end of an economic expansion and the start of a contraction in a business cycle; the peak of the cycle refers to the last month before several key economic indicators, such as employment and new housing starts, begin to fall; it is at this point that real GDP spending in an economy is its highest level.

Trough

the stage of the economy's business cycle that marks the end of a period of declining business activity and the transition to expansion