AP Macro Unit 2: Economic Indicators and the Business Cycle

Economists measure the health of the economy by looking at key economic indicators like gross domestic product (GPD), the … rate, and the … price index, which measures inflation.

Unemployment; consumer

The circular flow model shows how households, businesses, and the … interact

Government

Gross domestic product (GDP) is the dollar value of all … goods and services produced within a country in one …

Final; year

There are three types of unemployment: … The economy is at full employment when there is no … unemployment.

Frictional; structural, and cyclical; cyclical

… GDP is adjusted for inflation and expressed in constant, or unchanging, dollars. … GDP is not adjusted for inflation.

Real; nominal

How does the expenditures approach measure GDP?

The expenditure approach adds up all the spending done in the economy be households, businesses, the government, and other countries.

GDP = (Can I Get X-tra Mayo)

C (consumers spending) + I (business investments) + G (government spending) + (X - M) (net exports)

How does the income approach measure GDP?

The income approach adds up all the income earned in the economy including wages, rent, interest, and profit.

National Income =

W (wages) + R (rents) + I (interest) + PR (profit)

How does the value-added approach measure GDP?

The values-added approach calculates GDP by adding up the dollar value added at each stage of the production process.

Businesses sell goods and services to households in the … market and households sell resources to … in the resource market.

Product; businesses

Public goods and services are provided by the … and are funded by …

Government; taxes

Consumer Spending

The amount of money individuals and households spend on final goods and services for personal use.

Investment Spending

Expenditures made by businesses and individuals on capital goods such as machinery, equipment, and buildings.

Government Spending

Expenditures made by federal, state, or local governments on goods, services, infrastructure projects, social programs, defense, etc., using taxpayer funds.

Net Export

Represent the difference between a country's total exports (goods and services sold abroad) and its total imports (goods and services purchased from abroad)

Three types of transactions that are not included in GDP.

1) Intermediate goods (GDP includes only final goods - price of finished car, not the radio or tires) 2) Non-production transactions or financial transactions (used goods, stocks, or real estate) 3) Non-market activities (illegal production or illegal labor)

Frictional Unemployment

The type of unemployment that occurs when workers are in between jobs or are searching for their first job.

Structural Unemployment

When the skills of workers do not meet the skills demanded of such workers by employers.

Cyclical Unemployment

Someone who is laid off because a company isn't selling enough due to a recession and can't afford to pay them.

Why are discouraged workers not included in the employment rate?

The unemployment rate includes workers with jobs or actively looking for work. Individuals that are not looking for work are not part of the labor force.

What is the natural rate of unemployment (NRU)?

The NRU is the amount of unemployment that exists when the economy is healthy. It includes both frictional and structural unemployment, but not cyclical unemployment.

What is the difference between the CPI and the GDP Deflator?

The CPI measures prices of a fixed basket of consumer goods. The deflator is an index number that measures all prices and is used to convert nominal GDP into real GDP.

Identify who is hurt and who is helped by unexpected inflation.

Savers and lenders (that lend at fixed interest rates) are hurt and borrowers are helped.

Nominal GDP is measures in current rices and does not account for … whereas … GDP is expressed in constant, or unchanging, dollars.

Inflation; real