Unit 2 AP Macro

real flow

this consists of (on the circular flow chart)

• resources

• factors of production

money flow

this consists of (on circular flow chart)

• monetary flow

• money

leakage

money leaves circular flow

1. import of a good

2. savings

3. taxes

injection

money joins circular flow

1. export goods

2. loans

   1. government

Government makes purchases in both the factor and product market. They also provide goods and services, public avaialbe resources + charges both households and business taxes

What is the role of the government in the circular flow model when the government is a third economic actor?

households and businesses

identify the econmic actors above

sales, rent, wages, interest, profit

identify the money flows 

goods, services, land, labor, capital, entrepreneurship

Identify the real flows

product market and factor (resource) market

Identify the markets

GDP (gross domestic product)

the total value of goods and services produced within a country during a calendar year.

GDP dividing by the population, estimate of wealth per person

What is the formula for per capita GDP and what does the number indicate?

Income

add all wages, rent, interest, and profit within a country

Value added

add all prices of intermediate goods, changes in price between sales of intermediate goods, final goods, and services

C + Ig + G + (X-M)

What is the GDP Expenditure Approach formula?

Government Expenditure, money spent by the government

What is G?

Consumption, money spent by people for personal reasons

What is C?

Exports, Xn = (exports - imports)

What is X?

Imports

What is M?

Gross investment, money increased by businesses into the business itself

What is Ig?

citizens who are 16 years old and up, actively looking for work

Who makes up the labor force?

Unemployed/Labor Force times 100,

ALSO

Unemployed/ Unemployed +Employed times 100

What is the formula for the unemployment rate?

Employed + Unemployed/ Working age population times 100

What is the formula for the labor force participation rate?

They no longer try to find jobs, cant find jobs even when applying, decreases amount of unemployed, decrease in labor force participation rate

When unemployed workers become discouraged workers, what happens to the unemployment rate?

unemployed, become employed, decrease in unemployment, increase in employment (labor force stays constant)

When unemployed workers find part time work, what happens to the unemployment rate?

Frictional

unemployment caused by natural movement between jobs

Structural

unemployement caused by changes in technology or structure of economy

Cyclical

unemployment caused by business cycle

Rate of unemployment with no cyclical unemployment (only use structural and frictional)

Define the natural rate of unemployment

lower labor force participation rate, raise unemployment rate

Recession

When the price of a product has been adjusted for price changes (base year price)

Real Value

when the general level of prices rise

Inflation

When the price of a product has not been adjusted for price changes (current year price)

nominal value

When prices are rising but at a slower rate than they had been in the past

disinflation

a number to track changes in the prices of a market basket of goods and services

consumer price index

when the general level of prices falls

deflation

comparing price changes due to inflation using certain goods

CPI (consumer price index)

When prices go up, some will buy substitiutes instead, so that they don’t feel the effects of inflation as much

Why does substituion bias have a less accurate measure in CPI?

Some products get better, so consumers are okay with a price increase, CPI isn’t able to express this

Why does Quality change Bias have a less accurate measure in CPI?

CPI is based on static market. As consumer spending habits change based on current market, price changes in market basket won’t affect the true impact on average consumers

Why does New Goods Bias have a less accurate measure in CPI?

Hurt

A person who saves a lot of money (are thye helped, hurt, or unaffected?)

Unaffected

A person whose wages rise with inflation
(are they helped, hurt, or unaffected)

Helped

A person in debt
(are they helped, hurt, or unaffected)

the money they pay back has less real value as inflation increases

Why are borrowers helped by higher than expected inflation?

the lender is hurt because the money paid back has less real value as inflation increases

Why are lenders hurt by higher than expected inflation?

expressed using base year nominal prices 

Real GDP

expressed with current year prices, not adjusted for inflation

Nominal GDP

CPI (some basket of goods) / while GDP deflator is calculating all goods and services

What is the difference betweent he CPI and GDP deflator?

Q year + Current Year Price

What is the formula for nominal value?

Q year * Base year prices

What is the formula for real value?

Trough

This phase marks the end of a recession
(peak, trough, expansion, contraction)

Expansion

this phase can be predicted by an unexpected increase in business inventories

((peak, trough, expansion, contraction))

Contraction

When the unemployment rate is increasing
(peak, trough, expansion, contraction)

Contraction

When GDP output is decreasing
(peak, trough, expansion, contraction)

Expansion

When national income is increase (produce more)
(peak, trough, expansion, contraction)

Trough

When unemployment is at its highest

(peak, trough, expansion, contraction)

Peak

When inflation is likely to be at its highest
(peak, trough, expansion, contraction)

Peak

When it’s hardest for businesses to find new workers
(peak, trough, expansion, contraction)

points

Peak and Trough are both….on the business cycles

growing and decreasing on the line

Expansion and Contraction are both…

below potential

Recessionary Gap is…?

above potential

Inflationary Gap is…?

Nominal GDP goes up, even when production remains constant

What happens to the Nominal GDP when prices rise, even if production stays the same?

Real GDP takes into account inflation and increases when production has increased

Why is Real GDP a better measure of economic growth than Nominal GDP?

Real GDP isn’t affected by inflation, because output quantities are multiplied by the same base year points

How does inflation affect Real GDP?

measures total economic output using current year prices

What is Nominal GDP?

Adjusts for inflation to reflect actual economic growth

What is Real GDP?

Measures the overall price level and is used to convert Nominal GDP into Real GDP

What is the meaning of GDP Deflator

Real GDP accounts for inflation + only grow when output levels have risen

Discuss why Real GDP is a better indicator of actual economic growth than nominal GDP

Nomainal GDP grows from prices rise due to inflation and from an increased output level

Why does Real GDP grow more slowly than Nominal GDP when inflation is present?

As CPI increases, real GDP decreases

If the GDP Deflator increases, what happens to Real GDP?

helps see a more accurate depiction of the economy

How does converting Nominal GDP to Real GDP help policymakers make better economic decisions?