AP Macro Unit 2

Aggregate Output

The total amount of goods and services produced in an economy over a specific period of time.

Gross Domestic Product (GDP)

The total market value of all final goods and services produced within a country's borders in a given period of time.

Nominal GDP

The market value of all final goods and services produced in a country during a given period, measured in current dollars (unadjusted for inflation).

Real GDP

The market value of all final goods and services produced in a country during a given period, adjusted for changes in the price level (inflation or deflation) to reflect actual output.

GDP Deflator

A price index that measures the overall level of prices for all new, domestically produced, final goods and services in an economy, used to convert nominal GDP to real GDP.

Final Goods

Goods purchased by their ultimate users (e.g., a car bought by a consumer), included in GDP calculations.

Intermediate Goods

Goods used in the production of final goods (e.g., tires used to make a car), not counted separately in GDP to avoid double

Value

Added Approach

Expenditure Approach

A method of calculating GDP by summing all spending on final goods and services: C + I + G + (X

Income Approach

A method of calculating GDP by summing all incomes earned by resource suppliers plus taxes and depreciation allowances.

Circular Flow Diagram

A model showing the flow of goods, services, resources, and money between households and firms through product and factor markets.

Product Market

The market where households buy goods and services from firms.

Factor Market

The market where firms buy factors of production (land, labor, capital) from households.

Consumer Spending (C)

Household expenditures on durable goods, nondurable goods, and services.

Investment Spending (I)

Firm expenditures on capital goods (machinery, buildings) and changes in inventories.

Government Spending (G)

Expenditures by all levels of government on goods and services (excluding transfer payments).

Net Exports (X

M)

Exports (X)

Goods and services produced domestically and sold to foreigners.

Imports (M)

Goods and services produced abroad and purchased domestically.

Transfer Payments

Government payments to individuals without receiving goods or services in return (e.g., Social Security), not included in GDP.

Unemployment

The condition where individuals who are willing and able to work cannot find jobs.

Unemployed

Individuals who are without work but actively seeking employment during the reference period.

Labor Force

The sum of employed and unemployed individuals aged 16 and older who are not in institutions or the military.

Employed

Individuals aged 16 and older who have jobs, including part

Unemployment Rate

The percentage of the labor force that is unemployed: (Unemployed / Labor Force) × 100.

Labor Force Participation Rate

The percentage of the working

Frictional Unemployment

Unemployment due to workers transitioning between jobs or entering the workforce (short

Structural Unemployment

Unemployment due to a mismatch between workers' skills and job requirements, often caused by technological changes or shifts in industries.

Cyclical Unemployment

Unemployment caused by economic downturns or recessions, where aggregate demand is insufficient.

Natural Rate of Unemployment

The sum of frictional and structural unemployment that exists when the economy is at potential output (typically 4

Full Employment

The situation where unemployment equals the natural rate (no cyclical unemployment), and the economy is at potential GDP.

Underemployed

Workers who are employed but in jobs below their skill level or working fewer hours than desired (e.g., part

Discouraged Workers

Individuals who want to work but have given up actively searching for a job due to perceived lack of opportunities; not counted in the labor force.

Price Level

The average level of prices of goods and services in an economy.

Inflation

A sustained increase in the general price level of goods and services over time.

Hyperinflation

Extremely high and accelerating inflation rates (often over 50% per month), leading to economic instability.

Deflation

A sustained decrease in the general price level of goods and services over time.

Consumer Price Index (CPI)

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

Producer Price Index (PPI)

A price index measuring the average change over time in the selling prices received by domestic producers for their output.

Inflation Rate

The percentage rate of change in the price level over a specific period: ((Current Price Index

Market Basket

A fixed set of goods and services used to measure price changes in indices like CPI.

Real Values

Nominal values adjusted for changes in the price level (e.g., real wages, real GDP).

Nominal Values

Values measured in current dollars, unadjusted for price changes (e.g., nominal wages, nominal GDP).

Business Cycle

The recurring pattern of expansion (boom) and contraction (recession) in economic activity around the long

Expansion

A phase of the business cycle where real GDP is increasing, employment is rising, and the economy is growing.

Peak

The highest point of economic activity in the business cycle, after which contraction begins.

Contraction

A phase of the business cycle where real GDP is decreasing, often leading to higher unemployment.

Recession

A significant decline in economic activity lasting more than a few months, typically defined as two consecutive quarters of negative GDP growth.

Trough

The lowest point of economic activity in the business cycle, after which recovery and expansion begin.

Leading Economic Indicators

Variables that change before the economy as a whole changes, used to predict business cycle turning points (e.g., stock prices, building permits).

Coincident Economic Indicators

Variables that change at the same time as the overall economy, reflecting current state (e.g., GDP, employment levels).

Lagging Economic Indicators

Variables that change after the economy as a whole changes, confirming trends (e.g., unemployment duration, interest rates).

Potential GDP

The level of real GDP an economy can achieve at full employment, representing sustainable output without inflationary pressures.1.2sinclude all formulas, all the littlest details, be specificBelow is a comprehensive Unit 2 guide for AP Macroeconomics, tailored for Quizlet with terms and definitions separated by a dash (

Gross Domestic Product (GDP)

The total monetary value of all final goods and services produced within a country’s borders over a specific period, measured in current dollars for nominal GDP or constant dollars for real GDP.

Nominal GDP

The value of all final goods and services produced domestically in a given period, measured in current market prices (unadjusted for inflation). Formula: Nominal GDP = Σ (Price in current year × Quantity in current year).

Real GDP

The value of all final goods and services produced domestically in a given period, adjusted for inflation using a base year’s prices. Formula: Real GDP = Σ (Price in base year × Quantity in current year).

GDP Deflator

A price index that measures the overall price level of goods and services included in GDP, used to convert nominal GDP to real GDP. Formula: GDP Deflator = (Nominal GDP / Real GDP) × 100.

Final Goods

Goods and services purchased for final use by consumers or businesses, included in GDP to avoid double

Intermediate Goods

Goods used in the production of final goods, not counted separately in GDP to avoid double

Expenditure Approach

A method to calculate GDP by summing all spending on final goods and services. Formula: GDP = C + I + G + (X

Income Approach

A method to calculate GDP by summing all incomes earned in production (wages, rent, interest, profits) plus indirect taxes and depreciation. Formula: GDP = Wages + Rent + Interest + Profits + Indirect Taxes + Depreciation.

Value

Added Approach

Consumer Spending (C)

Household expenditures on durable goods (e.g., cars), nondurable goods (e.g., food), and services (e.g., haircuts), typically the largest component of GDP.

Investment Spending (I)

Business expenditures on capital goods (e.g., machinery, factories) and changes in business inventories; includes residential investment (e.g., new homes).

Government Spending (G)

Expenditures by federal, state, and local governments on goods and services (e.g., roads, schools), excluding transfer payments like Social Security.

Net Exports (X

M)

Exports (X)

Goods and services produced domestically and sold to foreign buyers, included in GDP.

Imports (M)

Goods and services produced abroad and purchased domestically, subtracted from GDP in the expenditure approach.

Transfer Payments

Government payments to individuals (e.g., Social Security, unemployment benefits) not in exchange for goods or services, excluded from GDP.

Circular Flow Diagram

A model illustrating the flow of goods, services, and money between households and firms through product markets (where goods/services are sold) and factor markets (where resources are traded).

Product Market

The market where households purchase goods and services from firms (e.g., buying clothes at a store).

Factor Market

The market where firms purchase or hire factors of production (land, labor, capital, entrepreneurship) from households (e.g., hiring workers).

Double

Counting

Non

Market Activities

Underground Economy

Unreported or illegal economic activities (e.g., cash

Depreciation

The reduction in value of capital goods over time due to wear and tear, included in the income approach as part of gross investment.

Net Domestic Product (NDP)

GDP minus depreciation, representing the value of output after accounting for capital consumption. Formula: NDP = GDP

Labor Force

The sum of employed and unemployed individuals aged 16 and older, excluding those in institutions (e.g., prisons) or the military. Formula: Labor Force = Employed + Unemployed.

Employed

Individuals aged 16 and older who have jobs, including full

Unemployed

Individuals aged 16 and older who are jobless, actively seeking work within the past four weeks, and available to work.

Unemployment Rate

The percentage of the labor force that is unemployed. Formula: Unemployment Rate = (Unemployed / Labor Force) × 100.

Labor Force Participation Rate

The percentage of the working

Frictional Unemployment

Short

Structural Unemployment

Unemployment caused by a mismatch between workers’ skills and job requirements, often due to technological changes or industry shifts (e.g., coal miners after automation).

Cyclical Unemployment

Unemployment resulting from economic downturns or recessions when aggregate demand falls below potential output.

Natural Rate of Unemployment (NRU)

The unemployment rate when the economy is at full employment, consisting of frictional and structural unemployment (typically 4

Full Employment

The condition where the unemployment rate equals the natural rate, with no cyclical unemployment, and the economy operates at potential GDP.

Underemployed

Workers employed in jobs below their skill level or working part

Discouraged Workers

Individuals who want jobs but have stopped actively seeking work due to perceived lack of opportunities, not counted in the labor force or unemployment rate.

U

3 Unemployment Rate

U

6 Unemployment Rate

Price Level

The average level of prices for goods and services in an economy, often measured by indices like CPI or GDP Deflator.

Consumer Price Index (CPI)

A measure of the average change in prices paid by urban consumers for a fixed market basket of goods and services (e.g., food, housing). Formula: CPI = (Cost of Market Basket in Current Year / Cost of Market Basket in Base Year) × 100.

Market Basket

A fixed set of goods and services (e.g., food, transportation, housing) used to track price changes in CPI or PPI calculations.

Inflation

A sustained increase in the general price level over time, reducing purchasing power.

Inflation Rate

The percentage change in the price level over a period. Formula: Inflation Rate = ((Current CPI

Deflation

A sustained decrease in the general price level, increasing purchasing power but potentially signaling economic weakness.

Hyperinflation

Extremely rapid inflation (e.g., 50% or more per month), causing severe economic disruption and loss of confidence in currency.

Producer Price Index (PPI)

A measure of the average change in selling prices received by domestic producers for their output, often a predictor of future CPI changes.