APEX AP Macroeconomics Unit 3

Business Sector

A part of a nation's economy composed of the people who rent or buy factors of production and use them to create goods and services.

Consumption

Expenditures by the household sector on goods and services for a period of one year; abbreviated C.

Depreciation

The value of the capital that wears out over the course of a year.

Double counting

An inclusion of the value of an intermediate good or service in the calculation of GDP.

Durable goods

A good used up at a slow rate when it is consumed.

Expenditure

The amount of money used to buy goods or services within a period of time.

Exports

Expenditures by the foreign sector on domestic goods and services for a period of one year; abbreviated X.

Final good

A good being sold for the last time.

financial intermediary

A firm that brings together people who have money to loan with people who want to borrow money.

Financial market

A market in which financial intermediaries enable borrowers and lenders to trade savings and interest income.

Flow variable

A variable whose value is determined over a period of time.

Government expenditures on goods and services

Expenditures by the government sector on goods and services for a period of one year; abbreviated G.

Government sector

A part of a nation's economy composed of the local, state, and federal governments.

Gross domestic product

The total value of all final goods and services produced within a nation's borders in one year. Equal to total expenditure in a year. Total income equals GDP as well. (All the money spent on final goods and services in the economy in one year is equal to all the income earned in the economy in one year.)

Gross national product

The total value of all final goods and services produced by all of the members of a nation in one year.

Household sector

A part of a nation's economy composed of the people who own factors of production; this group rents or sells the factors to the business sector and buys the goods and services produced by that sector.

Imports

Expenditures by the household, business, and government sectors on goods and services made by the foreign sector for a period of one year; abbreviated M.

Income

Money earned by the owners of the factors of production.

Injections

An expenditure by the business, government, or foreign sectors on domestic goods or services, including investment, government purchases, and exports.

Interest

A payment a borrower makes to a lender in exchange for the use of the lender's funds.

Intermediate goods

A good used up in making and selling another good or service; it is produced by a firm and sold to another firm.

Investment

Expenditures by the business sector on capital goods for a period of one year; abbreviated I.

Leakages

Uses of household income on things other than consumption; income saved, spent on imports, and paid in taxes.

Net domestic product

GDP minus depreciation.

Net exports

Exports minus imports; abbreviated NX.

Non-durable goods

A good used up at a fast rate when it is consumed.

Real GDP

A calculation of GDP using chaining and base year prices, so that changes in RGDP only reflect changes in production.

Rest of the world sector

A group of people who participate in a nation's economy, but who aren't a part of that nation.

Stock variable

A variable whose value is determined at a point in time.

Transfer payments

Money or services given by the government to households or businesses; they are not given in exchange for a good or service.

Business cycle

A pattern over time in which increases in RGDP are followed by decreases in RGDP, and decreases are followed by increases.

Contraction

The period of time over which RGDP goes from a peak to a trough.

cyclical unemployment

Unemployment caused by fluctuations in production associated with the business cycle.

Discouraged worker

A person who has given up looking for a job after trying to get one. A discouraged worker is not counted as a member of the labor force.

Expansion

The period of time over which RGDP goes from a trough to a peak.

Frictional unemployment

Unemployment caused by people moving between jobs.

GDP gap

The difference between the actual RGDP and the potential RGDP.

Index of leading indicators

A number that represents a collection of certain economic variables; the index is meant to predict future changes in RGDP.

Labor force

The members of a nation who are actively looking for work and are not retired, under sixteen years old, suffering from mental or physical problems that prevent them from being employed, in jail, or in the military.

Peak

A point in time at which RGDP is at a relative maximum.

Potential RGDP

The level of RGDP that occurs at full employment.

Seasonal unemployment

Unemployment caused by fluctuations in production due to changes in the time of year.

Structural unemployment

Unemployment caused by factors affecting the structure of the economy, such as the types of goods and services produced, the types of education workers have, government subsidies, and laws that regulate economic activities.

Trough

A point in time at which RGDP is at a relative minimum.

Unemployment rate

The percentage of the workforce currently unemployed and actively looking for employment.

Base year

The year in which the composition of the market basket is set for the CPI; CPI is always 100 in the base year

Bond

A contract issued by a borrower that allows the holder to receive interest payments as well as the repayment of the savings the borrower originally received.

Capital goods

Machinery, buildings, and so on; these are produced goods that are used to make other goods and services and that are not used up when making the other good or service. Capital has to be something that people made. This excludes physical labor and natural resources.

Certificate of deposit

A financial instrument similar to a bond; it is issued by a bank and is guaranteed by the FDIC.

Chaining

A method of calculating RGDP by using the average growth rates of output between successive years.

Consumer price index (CPI)

A price index created by using a market basket. The CPI is intended to show the cost of the purchases of an "average" household. The CPI measures the price level.

Cost-push inflation

Inflation caused by general decreases in businesses' supply of goods and services.

Deflation

An decrease in price level over time, in which many or all prices decrease.

Demand-pull inflation

Inflation caused by general increases in consumers' demand for goods and services.

Disinflation

A situation in which prices are increasing at a slower rate.

Federal funds rate

The interest rate banks charge each other on overnight loans.

Financial instrument

A tool that uses a person's savings to earn interest.

Inflation rate

The percent change in the price level from one year to the next.

Interest rate

The interest payments made on a loan, expressed as a percentage of the amount of the loan.

Investment demand

An inverse relationship that shows the amount of capital goods businesses are willing and able to purchase at various interest rates.

Investment demand curve

A graphical representation of investment demand.

Market basket

A list of the typical goods and services an urban household buys in one year, used in the calculation of the CPI.

Menu costs

Costs that businesses incur to update their pricing information when there's a price increase.

Money market mutual fund

A mutual fund that invests in relatively safe investments, such as short-term bonds.

Mortgage rate

The interest rate financial intermediaries charge on home loans.

Mutual fund

A financial instrument that combines the savings of a group of people and invests the savings into other financial instruments.

Nominal interest rate

The interest rate that includes a component representing inflation.

Nominal variable

A variable that includes a component showing inflation.

Positive rate of time preference

An expression of the fact that people prefer to receive money today, rather than waiting until tomorrow to receive it.

Price index

A number used to measure general price trends in an economy. This number is based on the prices of a selection of goods and services.

Prime rate

The interest rate banks charge their very best customers.

Producer price index

A price index created by using the prices of production goods.

Real interest rate

The interest rate that does not include a component representing inflation; the real interest rate equals the nominal interest rate minus the rate of inflation.

Real variable

A variable that does not include a component showing inflation.

Stock

A share of ownership in a company.

Substitution bias

A condition that leads to the CPI overstating the price level. Price increases cause consumers to substitute lower priced items for higher priced ones. However, the fixed market basket results in the CPI showing an inaccurate increase in spending.

T-bond

A bond issued by the U.S. Treasury Department.

US Treasury Department

A part of the executive branch of the federal government that acts like a bank for the federal government by collecting its tax revenues, handling its payments, and obtaining loans for it.

Factor Market

Where factors of production are exchanged for wages and salary

Flow

A variable measured over time

Stock Variable

A variable measured at a specific point in time

Factors excluded from GDP

-Illegal and non-market transactions
-The value of the sale or purchase of stocks
-Financial transactions
-Government transfers of money or services

unplanned inventory investment

occurs when actual sales are lower than businesses expected, leading to unplanned increases in inventories; sales in excess of expectations result in negative unplanned inventory investment. Falls into the category of "investment spending" so it is counted as part of GDP.

Ways in which household income is spent:

Households either buy goods and services, save their money, pay taxes, or buy imports. Of those categories, the last three — savings, taxes, and imports — are called leakages.

Equation relating different aspects of the economy

I + G + X = S + T + M
(Imports+Gov't expenditure+exports=savings+taxes+imports)

Net Domestic Product (NDP)

NDP is GDP minus depreciation.

Causes of the production possibilities frontier for an economy shifting outward:

-Increase in the factors of production
-Technological growth
Outward shift means economic growth is taking place

Things wrong with real GDP calculations:

-An increase in real GDP can cause total household income to increase, but if the population increases more than the income, households will be worse off.
-Or, the increased production could damage the environment. In that case, the cost of the environmental damage can exceed the value of the additional production.

index of leading indicators

The collective data of variables that might affect the economy (ex: stock market, unemployment) collected by the government that predicts the future of the economy

Cyclical Unemployment in relation to other kinds of unemployment

-The economy is said to be at full employment when the cyclical unemployment rate is zero. Unemployment, however, is not zero, since there is still structural and frictional unemployment.
-Although the unemployment rate can't be negative, cyclical unemployment can be. If frictionally or structurally unemployed workers are hired, then the cyclical unemployment rate is negative.

Potential Real GDP

the production the economy would achieve at full employment

Full employment is the situation in which the economy operates at an unemployment rate equal to the sum of:

seasonal, structural, and frictional unemployment

How to calculate CPI

compare the cost of the market basket in the current year with the cost of the market basket in the base year. First we add up the cost of all the goods and services in the market basket in the current year, so we have a cost for the whole market basket. We do the same for the market basket in the base year. Then we divide the cost of the market basket in the current year by the cost of the market basket in the base year and multiply by 100.

Problems with CPI

substitution bias, introduction of new goods, unmeasured quality change

Components of the interest rate

Positive rate of time preference, inflation, size of the loan, risk, future uncertainty, and transaction costs

Investment Demand Curve

-The investment demand curve shows us the relationship between the interest rate and the quantity of investment demanded.
-When the interest rate is high, the quantity firms borrow is low, because borrowing is expensive. Therefore, firms invest less in capital. When the interest rate is low, the opposite is true. The low cost of borrowing encourages more borrowing, and firms buy more capital goods.
-If anything besides interest changes and causes a change in the amount of investment firms are willing to undertake, the investment demand curve shifts. An increase is a shift to the right; a decrease is a shift to the left.

Real Income

income measured in terms of purchasing power; We use the CPI to determine the purchasing power of income. Equal to nominal income divided by the CPI for the current year times 100

Nominal Income

the dollar value of the income earned in any year; It isn't adjusted for the purchasing power of the income earned.

How inflation affects borrowers and lenders

1. Actual Inflation > Anticipated Inflation: borrowers gain, lenders lose
2. Actual Inflation < Anticipated Inflation: borrowers lose, lenders gain
3. Inflation does not help borrowers or lenders in a systematic manner.

What sector of the economy lends money?

Households