AP Macro Unit 3 - Measuring the Economy

National income and product accounts (or national accounts)

keep track of the flows of money among different sectors of the economy

Household

a person or group of people who share income

Firm

an organization that produces goods and services for sale

Product markets

where goods and services are bought and sold

Factor markets

where resources, especially capital and labor, are bought and sold

Consumer spending

household spending on goods and services

Stock

a share in the ownership of a company held by a shareholder

Bond

a loan in the form of an IOU that pays interest

Government transfers

payments that the government makes to individuals without expecting a good or service in return

Disposable income

equal to income plus government transfers minus taxes, is the total amount of household income available to spend on consumption

Private savings

equal to disposable income minus consumer spending, is consumer spending that is not spent on consumption

Financial markets

the banking, stock, and bond markets, which channel private savings and foreign lending into investment spending, government borrowing, and foreign borrowing

Government borrowing

the amount of funds borrowed by the government in the financial markets

Government purchases of goods and services

total expenditures on goods and services by federal, state, and local governments

Exports

goods and services sold to other countries

Imports

goods and services purchased from other countries

Inventories

stocks of goods and raw materials held to facilitate business operations

Investment spending

spending on new productive physical capital, such as machinery and structures, and on changes in inventories

Final goods and services

goods and services sold to the final, or end, user

Intermediate goods and services

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

Gross domestic product (GDP)

the total value of all final goods and services produced in the economy during a given year

Value-added approach

survey firms and add up their contributions to the value of final goods and services

Expenditure approach

add up aggregate spending on domestically produced final goods and services in the economy--the sum of consumer spending, investment spending, government purchases of goods and services, and exports minus imports

Aggregate spending

the total spending on domestically produced final goods and services in the economy--is the sum of consumer spending, investment spending government purchases of goods and services, and exports minus imports

Income approach

add up the total factor income earned by households from firms in the economy, including rent, wages, interest, and profit

Value added

the value of a producer's sales minus the value of a producer's purchases of inputs

Net exports

the difference between the value of exports and the value of imports (X-IM)

Aggregate output

the total quantity of final goods and services produced within an economy

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 in order to remove the effects of price changes

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

Chain-linking

the method of calculating changes in real GDP using the average between the growth rate calculated using an early base year and the growth rate calculated using a later base year

GDP per capita

GDP divided by the size of the population; it is equivalent to the average GDP per person

Employed

people are currently holding a job in the economy, either full time or part time

Unemployed

people are actively looking for work but aren't currently employed

Labor force

equal to the sum of the employed and the unemployed

Labor force participation rate

the percentage of population aged 16 or older that is in the labor force

Unemployment rate

the percentage of the total number of people in the labor force who are unemployed

Discouraged workers

nonworking people who are capable of working but have given up looking for a job due to the state of the job market

Marginally attached workers

would like to be employed and have looked for a job in the recent past but are not currently looking for work

Underemployed

workers who would like to work more hours or who are overqualified for their jobs

Job search

workers who spend time looking for employment

Frictional unemployment

unemployment due to the time workers spend in job search

Structural unemployment

unemployment that results when workers lack the skills required for the available jobs, or there are more people seeking jobs in a labor market than there are jobs available at the current wage rate

Efficiency wages

wages that employers set above the equilibrium age rate as an incentive for better employee performance

Natural rate of unemployment

the unemployment rate that arises from the effects of friction; plus structural unemployment

Cyclical unemployment

the deviation of the actual rate of unemployment from the natural rate

Real wage

the wage rate divided by the price level to adjust for the effects of inflation or deflation

Real income

income divided by the price level to adjust for the effects of inflation or deflation

Inflation rate

the percentage increase in the overall level of prices per year

Shoe-leather costs

the increased costs of transactions caused by inflation

Menu costs

the real costs of changing listed prices

Unit-of-account costs

arise from the way inflation makes money a less reliable unit of measurement

Nominal interest rate

the interest actually paid for a loan

Real interest rate

the nominal interest rate minus the rate of inflation

Disinflation

the process of bringing the inflation rate down

Aggregate price level

a measure of the overall level of prices in the economy

Market basket

a hypothetical set of consumer purchases of goods and services

Price index

measures the cost of purchasing a given market basket in a given year (the index value is normalized so that it is equal to 100 in the selected base year)

Consumer price index (CPI)

measures the cost of the market basket of a typical urban American family

Producer price index (PPI)

measures the prices of goods and services purchased by producers

GDP deflator

for a given year is 100 times the ratio of nominal GDP to real GDP in that year