Macro Unit 2: Economic Indicators and the Business Cycle

AP Macroecoonomics

Gross Domestic Product (GDP)

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

expenditure approach

add up all the spending on final goods and services produced in a given year

GDP =

C + I + G + (X-M)

income approach

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

value added approach

add up the dollar value at each stage of the production process

the circular flow model shows how households, businesses, and the __________ interact

government

Business sell ____________________ to households in the __________ market

goods and services, product

households sell ______________ to business in the ___________ market

resources, resource

public goods and services are provided by the _______________

government

three types of transactions that are not included in GDP

intermediate goods, non production transactions, nonmarket and illegal activities

private sector

part of the economy that is run by individuals and businesses

public sector

the part of an economy that is controlled by the government.

factor payments

payment for the factors of production, namely rent, wages, interest, and profit

transfer payments

When the government redistributes income (ex: welfare, social security)

subsidies

A government payment that supports a business or market

percent change equation

year 2 - year 1 / year 1 x 100

intermediate goods

goods inside the finals goods don't count (ex: price of finished car, not the stock, radio, or cars)

nonproduction transactions

Financial Transactions (nothing produced)

Ex: Stocks, bonds, Real estate

Used Goods

Ex: Old cars, used clothes

Nonmarket and illegal activities

things made at home - household production

ex: unpaid work, black market, drugs

labor income

wages earned from performing work

Rental income

income earned from property owned by individuals

interest income

interest earned from loaning money to businesses

profit

money business have after paying all their costs

frictional unemployment

Temporary unemployment or being between jobs. Individuals are qualified workers with transferable skills. (ex: high school or college graduates looking for a job)

structural unemployment

changes in the workforce make some skills obsolete ex: milkman, VCR repairman

cyclical unemployment

unemployment caused by recession (ex: steelworkers laid off during recession)

natural rate of unemployment

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

explain why "full employment" does not mean 0% unemployment

Fric & struc will always exist (4%-5% no cyclical)

Consumer Price Index (CPI)

a measure of the overall cost of the goods and services bought by a typical consumer

CPI equation

100 x (cost of basket in current year/cost of basket in base year)

GDP deflator

measures change in prices of all goods produced

base year = 100

GDP deflator equation

Nominal GDP/Real GDP x 100

Who is hurt by unexpected inflation?

Lenders, savers, people living off fixed income, people providing a service for a fixed rate.

Who is helped by unexpected inflation?

People who borrowed at a fixed interest rate and renters on a fixed lease, a business where the price of the product increases faster than the price of resources

Nominal GDP

wage measured by dollars rather than purchasing power

Real GDP

wage adjusted for inflation

deflation

decrease in general prices or a negative inflation rate

disinflation

prices increasing at slower rates

discouraged workers

some people are no longer looking for a job because they have given up

labor force participation rate

percent of population in labor force

underemployed workers

someone who wants more hours but can't get them and is still considered employed

race/age inequalities

the overall unemployment rate doesn't show disparity for minorities and teenagers

false

T or F

On the circular flow model, businesses seel the factors of production to households

true

T or F

Intermediate goods are used in the production process to produce final goods

false ( G & S) included

T or F

Final goods are included in GDP but services are not counted

F (nonmarket trans)

T or F

Investment spending is spending on financial assets like stocks and bonds

F (nonmarket trans)

T or F

Welfare checks and subsidies to businesses are examples of transfer payments

true

T or F

transfer payments are not counted in the calculation of GDP

false (exports - imports)

T or F

the equation for net exports is imports minus exports

True (for rent)

T or F

new housing construction is considered investment and is counted in GDP

False (borders)

T or F

Canada's GDP includes goods produced in other countries by Canadian companies

they aren't willing or able to find a job

why are discouraged workers not included in the unemployment rate?

it stays the same - underemployed workers are still employed

what happens to the unemployment rate when full-time workers involuntarily become part-time workers?

Menu Costs

costs money to change listed prices, businesses must update menus, signs, etc

Shoe Leather Cost

The cost of transactions increase, people reduce their real money holdings so they . must spend time and effort making additional trips to the bank

Unit of Account costs

money doesn't reliably measure the value of goods/ services

nonmarket transactions

many goods and services provide value but don't count in GDP