AP MACRO Unit 2

NOT ❌ Included in GDP

1. Intermediate Goods

• Goods inside the final goods don’t count.

(e.g. Price of finished car, not the stock radio or tires)

2. Nonproduction Transactions

•Financial Transactions (nothing produced)

(e.g. Stocks, bonds, Real estate,

• Used Goods

(e.g. old cars, used clothes)

3. Non-Market and Illegal Activities

(e.g. household activities (chores), Black market, drugs)

Expenditures Approach

GDP = C + I + G + Xn

(Girls Can’t Ignore Guy’s Ex’s)

Income Approach

wages + rent + interest + profit

adding all the income earned from producing goods & services

Labor income + Rental income + Interest income + Profit

Nominal GDP

• measured in current prices

• does NOT account for inflation from year to year.

Real GDP

• expressed in constant, or unchanging, dollars

• adjusts for inflation.

Effect of Inflation

generally, rapid/high inflation is bad b/c:

• banks don’t lend

• ppl don’t save $$

this results in decreased investment and subsequently decreased GDP

Inflation

• reduces the “purchasing power” of money

• result: each dollar of income now buys fewer goods than before

Hurt by Inflation

Lenders (@ fixed interest rates)

(Ppl with) Fixed Incomes

Savers

Hurt

Ladies

Find

Solutions

Helped by Inflation

Borrowers

Business where price of product increases faster than cost of resources

Disinflation

prices increasing at slower rates

Deflation

DECREASE in general prices/negative inflation rate

bad b/c

• ppl will hoard money (financial assets)

• decreases consumer spending & GDP (expect further price drops)

Problems with CPI

1. Substitution Bias- As prices increase for the fixed market basket, consumers buy less of these products and more substitutes that may not be part of the market basket.

(Result: CPI may be higher than what consumers are really paying)

2. New Products- The CPI market basket may not include the newest consumer products.

(Result: CPI measures prices but not the increase in choices)

3. Product Quality- The CPI ignores both improvements and decline in product quality.

(Result: CPI may suggest that prices stay the same though the economic well being has improved significantly)

CPI

most commonly used measurement of inflation for consumers

Market Baskets

economists pick stuff they think people buy every year 

3 Causes of Inflation

Demand-Pull: demand exceeds supply, prices raised

Cost-Push: cost producing goods & services increases

Built-In: ppl expect prices to raise in future, so they act accordingly/in advance

Labor Force

# of people classified as either employed or unemployment (military & institutionalized are excluded)

Unemployment

Workers actively looking for a job but aren’t working

Unemployment Rate

% of people in the labor force who want a job but are not working.

Marginally Attached Worker

people available for work within the last 12 months not classified as employed or unemployed

Discouraged Worker

people previously classified as unemployed who exited the civilian labor force without finding employment

Frictional Unemployment

temporary unemployment/being in-between jobs

Structural Unemployment

caused by geographical or skills mismatch (non-transferable skills)

Natural Rate of Unemployment

frictional & structural unemployment are present at all times because people will ALWAYS be between jobs/replaced by tech (4-6%)

Cyclical Unemployment

unemployment caused by a recession

(decreased demand for goods + services, so decreased demand for labor)