AP MACRO UNIT 2

Circular Flow Model

3 Goals of Macro.

Promote economic growth, limit unemployment, keep prices stable

National income accounting

Economists collect statistics on production, income, investment, and savings

Gross Domestic Product (GDP)

The dollar value of all FINAL goods and services produced within a countries borders in one year

GDP Per Capita

GDP divided by the population. It identifies on berate how many products each person makes. It is the best measure of the nations standard living.

Equation for % Change in GDP

Year 2 - Year 1/ Year 1 × 100

Expenditures approach

sums up the market value of all final goods and services bought in an economy, using the formula: GDP = C + I + G + (X - M)

Consumer Spending

Money that individuals and households spend on final goods and services for personal use within a specific period.

Ex. Family buying groceries at super market

Investment Spending

Money for capital goods—such as machinery, equipment, buildings, and infrastructure—that will be used to produce other goods and services in the future.

Ex. A company purchases new machinery for its factory

Government Spending

Money a public sector body (like a national, state, or local government) spends on goods, services, and capital investments to fulfill its economic and social objectives.

Ex. Government builds a new highway

Net Exports

A country's total value of exported goods and services minus its total value of imported goods and services.

Ex. US exports airplanes to Europe, while importing oil from abroad.

Nominal GDP

GDP measured in current prices. It does not account for inflation from year to year

Real GDP

GDP expressed in constant or unchanging dollars. It adjusts for inflation.

3 things not included in GDP

Intermediate goods, Non-production transactions, Non-market & Illegal activities

Intermediate Goods

Products that go directly into creating another product

Non-Production Transactions

Financial Transactions (nothing produced)

Non-Market & Illegal Activities

Things made at home- household production

Unemployment

Workers that are actively looking for a job but aren’t working

Types of unemployment

Frictional, structural, and cyclical unemplyment

Frictional unemployment

Temporary unemployment or between jobs

Structural unemployment

Changes in the labor force make some skills obsolete

Cyclical Unemployment

Unemployment caused by a recession

Full Employment Output

The real GDP created when there is no cyclical unemployment

The Unemployment Rate

The percent of people in the labor force who want a job but are not working

Unemployment rate equation

# unemployed/ # in labor force x 100

Labor Force

People who are willing and able to work (above 16years old and not institutionalized)

Labor Force Participation Rate

Labor Force/ Working Age Population x 100

Natural Rate on Unemployment (NRU)

The amount of unemployment that exists when the economy is healthy and growing. (Frictional + structural unemployment).

Problems with Unemployment Rate

Discouraged Workers- People no longer looking for a job because they have given up.

Labor Force Participation- Percent of population in the labor force. If people leave labor force unemployed, rate falls.

Underemployed Workers- Someone who wants more hours but can’t get them is still considered employed.

Consumer Price Index (GPI)

A measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services

CPI Equation

Price of market basket/ Price of market basket in the base year x 100

Inflation

The rising general level of prices. It reduces the “purchasing” power of money.

When inflation occurs, each dollar of income will buy fewer goods than before.

Disinflation

When prices increase at a slower rate

Deflation

The decrease in general prices or a negative inflation rate.

GDP Deflator

A price index used to measure the overall level of prices for all goods and services produced in an economy over time

GDP Deflator equation

Nominal GDP/ Real GDP x 100

Who is helped by unexpected inflation

• Borrowers (people who borrow money)

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

Who is hurt by unexpected inflation

• Lenders (people who lend money at fixed interest rates)

• People with fixed incomes

• Savers

Nominal Wage

Wage measured by dollars rather than purchasing power

Real Wage

Wage adjusted for inflation (real worth)

Why would zero percent unemployment be bad?

Some level of unemployment is normal in a healthy economy.

Would freeze job mobility and be unrealistic.

Demand-Pull Inflation

Occurs when demand pulls up prices during an overheated economy.

Cost-Push Inflation

Occurs when higher production costs increase prices.

Quantity Theory of Money

Gov. printing more money to pay for spending means there is more money in the economy.

But, the amount of goods and services has not changed.

With this, prices go up, causing inflation.