AP ECON- MACRO UNIT 2A

based on a mix of class notes, chat gbt's descriptions, and the textbook

National income accounting

tracks all expenses for a nation. This is how we measure economic performance

Gross domestic product

market value of final G&S produced within a year in 1 nation

Gross national product 

value of final G&S produced within a year by americans (here or abroad)

Rules for calculating GDP

-Avoid double counting (Dont add sale value of intermediate goods to gdp)

-Include final goods only 

-Exclude Non production transactions (Private transfer payments, public transfer payments, secondary stock market, secondhand sales)

Final good

goods that are sold to a final customer

Intermediate goods

goods that are used in the production of other goods

Nominal GDP

GDP measured in price level (not adjusted for inflation)

In the circular flow model, what do households give to businesses through the product market

expenditures (C)

What do businesses get from the product market in the circular flow model 

Revenue (Ig) 

What do businesses give through the resource market in the circular flow model

costs

What do households recieve from businesses through the resource market in the circular flow model

WRiP

What are public transfer payments

Payments in the form of social security, welfare, verteran that the government makes directly to households.

Since the recievers dont contribute anything to production, it is exlcluded

What are private transfer payments

payments that transfer funds form one person to another and produce no output. Excluded.

-Allowance, cash gifts

What are financial asset transactions 

the buying and selling of stocks, bonds, and other financial assets. It is just transfering the ownership from 1 person to another, and is not creating any production. Excluded. 

Are payments provided by a broker included or exlcluded in GDP

Included because their services are provided and apart of economy;s output of G&S

What are secondhand sales

Something bought in a prior year that is resold. Contribute nothing to production. Excluded.

What are the two methods in calculating GDP

expenditure approach and income approach 

What is the expenditure approach formula

GDP= C+Ig+G+(X-n)

What is the income approach formula

GDP= W+R+i+P+I+(N)+D+S

What is the income households are getting from the circular flow model 

Factor payments (WRiP) 

What is C from the expenditure approach

Personal consumption expenditures.

3 types: Non durable goods, durable goods, services

What are durable goods 

-goods lasting more than 3 years (ex. cars) 

-people stop buying in a recession

-cyclical

What are non durable goods

-Goods last less than 3 years

-Inelastic

-Not cyclical

-EX: Food

What are services (C)

-non-cyclical 

EX: Hair, oil change 

What is Ig

gross private domestic investment

-Machinery/tools that a business can use

-Includes stuff that has been used up

-Most volatile

What are the three types of Ig

Residential (buildings)

Non-residential (capital)

Changes in inventory (Depends on intrest rates) 

What is G from the expenditure approach

Government spending

What is Xn

Exports-imports

(X-n)

When do we add to inventory

When something is produced and not sold

GDP-C=Ig

Disinvestment 

Subtracting investment 

selling or using up existing capital without replacing it

When things are sold but not produced this year we ____ the change in inventory

decrease

Gross and net investment refer to the ____ section

Non-residential section….the machinery, tools, & equip

Gross investment 

ALL investment 

IG= D+added capital 

what is another word for replacement capital

depreciation, or consumption of fixed capital

What is depreciation

Capital that was used up or worn out

What is added capital 

Net investment (Ig-D) 

New investment added to the stock of capital 

When is the economy expanding

when Ig>D

PPC shifting right

When is the economy static 

Ig=depreciation

Economy produces just enough capital to replace what’s used up 

PPC not moving

When is the economy declining

Ig<D

PPC moving inwardsWhe

How do you get Net investment

gross investment-depreciation

What is the difference btwn public and private corporations 

A public corporation sells ownership to the public through stocks, while a private corporation keeps ownership limited and doesn’t trade its shares on public markets.

What is w in income approach

Wages, salaries, and supplements'

Compensation of employees C

Can you calculate for GDP with a missing part

No!

What is R from income approach 

income earned on all rental properties

What is i from Income approach

Interest 

All income earned from gains on financial accounts 

What is P from Income approach

Proprietors income (private)+ Corporate profits (DUC) (public)

What is DUC from income approach

Divdends, undistributed corporate profits, corporate income tax

3 ways corporate profits are distributed

What is undistributed corporate profits AKA 

retained earnings 

What are the 4 adjustments

I+(N)+D+S

What is I from income appraoch

Indirect business taxes

AKA taxes on production and imports

What is N from income approach

Net foreign factor-two types 

SUBTRACT: NFF earned abroad 

ADD: NFF earned in US 

-If it just says NFF, then subtract 

What is D from income approach

consumption of fixed capital aka replacement capital

Capital that was used up or worn out

Shortcomings: Non market transactions

mon-market transactions are economic activities that do not involve money changing hands

they are not bought or sold in a market.

Net investment is also known as ___

Added capital

Short comings:: 

Leisure activity (ignored even though it improves well being)

Non-market transactions (Ignores unpaid work like taking care of a baby)

Underground economy (illegal or unreported economic activities)

Improved product quality (ignores living standards, health, leisure, or happiness.)

GDP & The environment (GDP counts production regardless of pollution or resource depletion.)

Composition & distribution of output (GDP shows total output but not how wealth is shared)

Non economic sources of well being (not measure its total well being)

Importance of immediate output (focuses on final output, misses everything in middle)

Types of unemployment 

Frictional 

Structural

Cyclical 

Why is Ig so volatile

People borrow money (for a long time) so very sensitive and those purchases can be postponed

What is S from the income approach

Statistical Discrepancy

Difference between expenditure and income approach

Frictional unemployment

-Voluntary unemployment 

-”Search and wait’ 

-In between jobs 

-New graduates

-Seasonality 

Frictional and structural are considered ___ in the economy

natural

Structural unemployment

-job loss b/c of lack of skill

-Technology changes

-Structure of job changes

-Lack sufficient skillsC

Cyclical unemployment

-Lack of demand for a job 

-Caused by a recession 

-Demand is falling 

-NOT NATURAL 

Getting laid off is considered ___ (unless b/c of performance)

cyclical

What is full employment rate

Full employment rate= frictional+structural

AKA Natural Rare of Unemployment (NRU)

AKA Full-employment rate of unemployment

At NRU, the economy is said to be producing at its ___ output 

potential 

Full employment

When cyclical=0 

Cyclical unemployment HURTS ECONOMY 

NAIRU

Non-accelerating inflationnary rate of unemployment

Lowest possible rate without inflation going above 2%

The unemployment rate is a ___ indicator

lagging

What three categories is population divided under 

-Under 16 or institutionalized (cannot be deemed as apart of labor force, even if they are working) 

-Not in labor forces ( Can be in labor force) 

-Labor force (unemployed+employed)

Sidelined workers are also known as ___

Discouraged workers

Labor force

Looking for a job and available to work or have a job

What type of unemployment is shown on the PPC’s frontier

Frictional and structuralW

What type of unemployment is at a point inside the PPC curve 

cyclical unemployment 

Where is NAIRU on the PPC

on the frontier

Where is the potential GDP on the PPC

Frontier

Why is a point outside the PPC important?

B/c inflation is above 2%, so we produced above our means

Where is there a GDP Gap on the PPC 

Between the point inside the curve and the frontier 

Unemployment rate formula

(unemployed/labor force) x 100

What is the population made up of

under 16+ Not in LF+ LF= Pop

Who obtains unemployement data and how

Buruea of labor statistics. 

They do this by sending a survery from 60k people by phone call 

CPS: Current population survery

If you are employed you work at least

15 hours per qeek I

If you don’t work for 1 week but still have a job, and a reasonable explanation why, you are ___

In the labor force

Unpaid family workers 

employed 

at least 16, 

Help out in a family business with no pay for 15+ hours per week 

Unemployed people

jobless, available, seeking work

Must be looking for work in past 4 weeks- ACTIVELY SEEKING

Not in LF

Neither employed or unemployed

GDP Gap 

Actual GDP-potential GDP. Can be negative or positive 

Which is more accurate, income or expenditure approach

Expenditure

not everyone reports income

What understates the unemployment rate

Part time workers

Discouraged/sidelined workers

Over stating unemployment rate: false info (people lie, underground economy)

Sidelined/discouraged workers 

Used to be unemployed, then stopped looking. Unemployment rate went from 100 to 0% because they left labor force

U₃

Official unemployment rate

U₄

U₃+ discouraged workers

U₅

U₄+ other “marginally attached workers”

Marginally attached workers

those who “would like” to work, but have not looked for work recently.

U₆

U₅+ Part time workers who want to work full time

GDP Gap as a percent of potential GDP: (%)

(Actual-Potential/Potential)x100

GDP Gap

forgone output, lost GDP

If the point is inside PPC it is recessionary/inflationary? 

recessionary 

Ecoconky moving too slow 

If the point is Outside the PPC it is recessionary/inflationary

inflationary

need to slow down economy

GDP gap in dollar value 

Actual GDP-Potential GDP

If the GDP GAP is negative, it is ___

recessionary