AP Macro Unit 2 Flaschards

What is the defintion of gdp?

• Dollar value of all FINAL GOODS AND SERVICES produced WITHIN A COUNTRY in ONE YEAR>

• Final goods: GDP only counts new goods and services

• Goods and services: tuition for college counts towards GDP (Service)

What is the expenditures approach of measuring GDP?

• Adding up all the spending on FINAL goods and services in the country in a year

• C + I + G + X_N

  • The four components of GDP

    • Consumer spending (70% of US GDP): purchases of final goods ansd services produced within the country (eg. a cake from panera)

    • Business Investment (16% of US GDP): business spending on tools to further production of capital goods and revenue (eg. panera buys more ovens to make bread)

    • Government spending (17% of US GDP): creating schools, roads, and tanks

      • Does not include transfer payments like social security (charity): nothing new created

    • Net exports: Exports(X) - Imports(M)

      • Value of 3 Paneras - 2 Olive Gardens (Italy)

CIGXN: commerce investment growth expense network

What is the income approach to measuring GDP?

Adding the income from all the spending andf not the spending itself

• Adding the INCOME from all the spending, not the spending itself

• Equation: W + R + I + PR

  • Labor income: wages earned from performing work (eg. amazon worker makes his minimum wage) (labor)

  • Rental income: income earned from property owned by individuals (eg. amazon worker pays rent to graham stephen) (land)

  • Interest income: interest earned from loaning money to businesses (eg. jp morgan profits from amazon worker trying to go to college, the worker is 5) (capital)

  • Profit: the money business have after paying off their costs (besos’s profits after paying workers) (entrepreneurship)

• These are called factor payments

  • Labor earns wages, land earns rent, capital earns interest, entrepreneurship earns profit

WRIPR:

What is the value-added approach to measuirng GDP?

• Value-Added Approach

  • Adding up the value added during each stage of production process

    • Eg. a tesla value = battery + wheels + engine + dumbass tech

Draw the circular flow matrix.

here it is!

What is not included in GDP value?

• Intermediate goods

  • Goods used in the production dont count towards the final product: ex, the graphics card in a pre-packed PC doesnt count, its the PC that does.

• Nonproduction transactions

  • Financial transactions

    • Stocks, bonds, real estate

    • Nothing was produced = not counted

  • Used goods

    • Dont count: not a final good/new product

• Illegal Activities or nonmarket activities

  • Nonmarket

    • Household production or home manufacturing doesnt count

  • Illegal

    • Black market, drugs

    • Doesnt count bc we dont know it exists / its illegal bro

INI, included.

What defines the labor force?

• 16+, able and willing to work, not in jail or hospitals, not in school full time, not retired, not in military

What defines unemployment?

• Actively looking for a job, but not working

What defines the labor force participation rate?

• (employed + unemployed) / working-age population

• Measures how big the labor force is related to its maximum

What defines the unemployment rate?

• # unemployed / # in labor force

Who is NOT COUNTED as unemployed?

• Discouraged workers

  • People who have been unemployed for so long that they give up are NOT counted as unemployed anymore because they have left the labor force by stopping looking for work

• Underemployed workers

  • If you are a part time worker and you want more hours, you are still employed

What are the 3 types of unemployment?

Frictional, structural, and cyclical (see other cards for specific meanings)

What is frictional unemployment?

• Frictional unemployment

  • Temporary unemployment, between jobs. QUALIFIED WORKERS with TRNSFERRABLE SKILLS who just haven’t found a job yet

    • Ex: just got out of college, or are moving between jobs

What is structural unemployment?

• Structure of the labor market has changed, making their skills obsolete

• Thus, their jobs wont come back, so their skills aren’t transferable and they need to learn new skills to get a job

  • Ex: ford wheel screwer-oner gets replaced by a robot and needs to learn new skills. Or a VCR repairman must get new skills bc no one uses VCR.

What is cyclical unemployment (and a way of remembering it)?

• Cyclical unemployment

  • Econ doing poorly, consumer spending goes down = layoffs

    • Econ is SICK = SICK-lytical unemployment

What defines the natural rate of unemployment?

• Frictional + structural unemployment

  • Will always exist = can never get it to 0. Thus, we aren’t trying to reduce unemployment to 0, we are just trying to fully employ what we can

• The amount of unemployment that exists when the economy is growing and doing well.

  • F and S unemployment ALWAYS EXIST.

  • If there is only F and S unemployment, the econ is doing well

What defines full employment output?

• GDP created when the econ is doing well and so there’s no cyclical unemployment

• The US is as full employment at 4-6% unemployment

  • In other countries with higher unemployment benefits or other support, higher unemployment rates still signify full employment output

• It is impossible to get to 0% unemployment

What is the CPI and how do we calculate it?

• Measures inflation

• Def

  • The base year is an index of 100 (usually 1982), and each year is given an index # as well

  • Pick some goods and services and track their prices to see if they go up or down

  • We measure inflation through looking at specific market baskets; include the same G&S’s that change overtime

    • Ex: if its 100 in 1982 and 240 in 2016, prices have increased in 140% ince 1982.

• Calculation

  • 

  • (prices of market basket) / (price of market base in base year) X 100

• The CPI for the base year is always 100, and the other years get a different number which changes relative to the base number.

How do we calculate inflation rate?

• Calculating inflation rate

  • 

What is the difference between the GDP deflator and the CPI?

• Measures price of all goods produced (the CPI measures the prices of goods and services bought by consumers)

• Includes services and goods bought by firms and the gov (which CPI doesnt include, because the CONSUMEr price index is focused on CONSUMERS)

• Includes only domestic goods and services: imported doesnt show up.

GAD (government/firms buying, ALL products, domestic)

What is the difference between nominal and real GDP?

• The problem with nominal gdp

  • Venezuela has an awesome GDP, but thats bc everything costs an insane amt

  • You have to weigh the costs of products

• Nominal GDP

  • Gdp measured in current prices, does not account for inflation

• Real GDP

  • Gdp expressed in constant dollars which NEVER CHANGE. Measures the value adjusted for inflation.

• The GDP Deflator

  • (Nominal GDP) / (Real GDP) * 100

    • The gdp deflator base year is always 100

    • The gdp deflator will spit out a number like “105” : this means that it has increased 5% since hte base year.

  • Remember its an index number, not a percentage.

What are the main problems with the CPI?

• Substitution Bias

  • Prices increase for goods measured by the CPI (market basket) = consumers buy other products

    • CPI is higher than how consumers are actually affected

• New Products

  • CPI market basket doesnt include the newest consumer products

    • Doesn’t reflect price trends of new products: measures prices, but not he increase in choices

• Product quality

  • Strictly quantitative, doesnt examine improvements/decline in product quality

    • The price of computers has increased by 100% since 1980, but the quality has increased by 9999999999%

    • CPi suggests econ policy reforms that dont reflect the wellbeign of the economy\

SNQ: substantial new question

Who is HURT by inflation? Why?

• Lenders who lend at fixed interest rates

  • If i lend money at 6% interest with 2% inflation, i expect a 4% return

  • If inflation ends up at 25%, i lose a ton of money

• Fixed incomes

  • I make $1000 a month = I make less a month (less purchasing power)

• Savers

  • Reduces the value of savings

Who is helped by inflation? Why?

• Borrowers

  • More inflation = pay back lenders with money worth less than it was when it was borrowed

  • = you net gain.

• Businesses where the price of the product increases FASTER than the price of resources

  • Means you spend less to return a higher profit

What is purchasing power?

• The value of a currency in terms of the # of goods you can buy with that currency amount.

What is the difference between nominal and real wage?

• Nominal wage

  • Wage strictly measured in dollars

• Real wage

  • Wage value ADJUSTED for inflation (eg. based off of purchasing power)

What is potential GDP?

our GDP is we have frictional and structural unemployment, but no cyclical unemployment

What is a recessionary gap (also called a negative output gap)?

• Recovering from a recession: the gdp is rising, but still below the potential GDp

What is the positive output gap?

• Positive Output Gap

  • Econ is moving faster than full employment: 

    • F and S unemployment are really low

    • Result is higher inflation

Draw the business cycle, with time on the x and real GDP on the y. Include the following vocab in your drawing: real GDP, potential GDP, positive output gap, peak, recession, trough, negative output gap

How does the business cycle and unemployment relate to the production possibilities curve?

The PPC can be represented by two lines: full employment, and 0% unemployment (unsustainable).

a low x and y ont he PPC represents below full employment, so we are at the trough, on the full employment line represents on the potential gdp, and in between full employment and 0% unemployment represents the peak.

Draw out the circular flow matrix: what are the basics of what you need to know

households and biz both demand and supply: houses demand in the product market and supply in the resource market, biz does the opost.e