AP Macroeconomics Unit 2

National Income Accounting

When economists collect statistics on production, income, investment, and savings

Gross Domestic Product

The dollar value of all final goods and services produced within a country's borders in one year. Most important measure of economic growth

GDP Per Capita

GDP divided by the population. It identifies on average how many products each person makes. Best measure of standard of living

Expenditures Approach

Add up all the spending on final goods and services produced in a given year

Income Approach

Add up all the income that resulted from selling all final goods and services produced in a given year

-- Labor Income/Rental/Income/Interest Income/Profit

Nominal GDP

GDP measured in current prices. It doesn't account for inflation from year to year.

Real GDP

GDP expressed in constant or unchanging dollars -- adjusts for inflation. Best measure of economic growth

The Business Cycle

Three Major Economic Goals for Every Country

1. Promote economic growth

2. Limit unemployment

3. Keep prices stable (limit inflation)

What is the formula to calculate the percent change in GDP?

(year 2 - year 1)/year 1 x 100

What are the 5 factors of productivity?

1. Economic system

2. Property rights

3. Capital -- countries with it can produce more

4. Human capital (knowledge, education, skills)

5. Natural resources

What is NOT included in GDP?

-Intermediate goods (goods inside final goods)

-Non production transactions (stocks, bonds, real estate)

-Non market/illegal activities (household production)

Four components of GDP

1. Consumer Spending

2. Investment (business spending on tools/equipment 3. Government spending (NOT transfer payments)

4. Net exports -- exports (x) - Imports (M)

GDP = ?

C + I + G + Xn

Income approach adds up

1. Labor income

2. Rental income

3. Interest income

4. Profit Factor payments

Unemployment

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

Frictional Unemployment

Temporary unemployment or being between jobs. Individuals are qualified workers with transferable skills

Structural Unemployment

Changes in labor force make some skills obsolete. Workers DO NOT have transferable skills and these jobs won't come back. Permanent loss of jobs = creative destruction. Workers must learn new skills

Cyclical Unemployment

Unemployment caused by a recession. As demand for goods/services falls, demand for labor falls and workers are fired. "Demand deficient unemployment"

How do you calculate the unemployment rate?

Percent of people unemployed(# unemployed)/(# in labor force) x 100

Who is in the labor force?

-Above 16 years

-Able/willing to work

-Not institutionalized (jail/hospital)

-Not in military, in school full time, or retired

Why is zero percent unemployment not our goal?

Frictional/structural unemployment are present always because people will always be between jobs or replaced by technology

The US is at full employment when there is what percent unemployment?

4-6%

Natural Rate of Unemployment (NRU)

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

Full Employment Output (Y)

The Real GDP created when there is no cyclical unemployment

Labor Force Participation Rate

Percent of population in the labor force. If people leave the labor force, the unemployment rate falls

What are the criticisms of the unemployment rate?

Discouraged workers: some people are no longer looking for a job because they have given up. Underemployed workers: Someone who wants more hours but can't get them is still considered employed

Inflation

The rising in the general level of prices and it reduces the "purchasing power" of money

Nominal Wage

Wage measured by dollars rather than in purchasing power

Real Wage

Wage adjusted for inflation Inflation

-- workers have to ask their boss for a raise

Who is hurt by unanticipated inflation?

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

-People with fixed incomes

-Savers

Who is helped by unanticipated inflation?

-Borrowers (people who borrow money)

-A business where the price of the product increases faster than the price of resources

Inflation Rate

The percent change in prices from year to year. Can use CPI to calculate this

Price Indices

Index numbers assigned to each year that show how prices have changed relative to a specific base year (base year given 100)

How do you calculate the inflation rate?

% change in prices = (year 2 - year 1)/(year 1) x 100

Problems with the CPI

1. Substitution bias

2. New products

3. Product quality

How do you calculate the GDP Price Index (Deflator)?

(Nominal GDP)/(Real GDP) x 100

Causes of Inflation

1. The government prints too much money

   ---If the government keeps printing money to pay off debts they could end up with hyperinflation

2. Demand - Pull Inflation: Demand pulls up prices

   -- overheated economy with excessive spending but the same goods

3. Cost - Push Inflation: Higher production costs increase Prices

Real Interest Rates

Percentage increase in purchasing power that a borrower pays. Real = Nominal - Inflation

Nominal Interest Rates

Percent increase in money that a borrower pays not adjusting for inflation

Circular flow model

A diagram that traces the flow of resources, products, income, and revenue among economic decision makers

Factor payments

the income people receive for supplying factors of production, such as land, labor, or capital

transfer payments

Benefits given by the government directly to individuals. Transfer payments may be either cash transfers, such as Social Security payments and retirement payments to former government employees, or in-kind transfers, such as food stamps and low-interest loans for college education.

Resource market

a market in which households sell and firms buy resources or the services of resources

Product market

the market in which households purchase the goods and services that firms produce

Circular flow diagram

a visual model of the economy that shows how dollars flow through markets among households and firms