AP Macroeconomics Unit 2

circular flow model

A model that shows the flow of goods and services and the interaction among households, businesses, and banks.

central economic problem

people have unlimited wants with limited resources

macroeconomics

the study of economy-wide phenomena, including inflation, unemployment, and economic growth.

microeconomics

the study of how households and firms make decisions and how they interact in markets.

economic goals

1.economic growth

2.full employment

3.economic efficiency

4.price level stability

5.economic fredom

6.an equitable distribution of income, economic security

7.balance of trade

structural unemployment

unemployment that occurs when workers' skills do not match the jobs that are available.

frictional unemployment

A type of unemployment caused by workers voluntarily changing jobs and by temporary layoffs; unemployed workers between jobs.

consumer price index (CPI)

weighted cost of base-period items in current year / weighted cost of base-period items in base year x 100

price change

change in CPI / beginning CPI x 100

labor force participation rate (LFPR)

number in labor force / adult population x 100

unemployment rate (UR)

number of unemployed / labor force x 100

anticipated inflation

Increases in the price level that occur at the expected rate.

unanticipated inflation

Increases in the price level at a rate greater than expected.

real GDP

GDP adjusted for inflation

nominal GDP

GDP measured in current prices

nominal income

the current dollar amount of a person's income.

real income

what an income will actually purchase after allowing for the effects of inflation.

disposable income

Income remaining for a person to spend or save after all taxes have been paid.

positive economics

the analysis of facts or data to establish scientific generalizations about economic behavior.

normative economics

The part of economics involving value judgments about what the economy should be like; focused on which economic goals and policies should be implemented; policy economics.

opportunity cost

Cost of the next best alternative use of money, time, or resources when one choice is made rather than another.

equilibrium

A situation in which the market price has reached the level at which quantity supplied equals quantity demanded.

supply

The amount of goods available.

demand

The desire, willingness, and ability to buy a good or service.

price indexes

help measure the economy by focusing on levels of inflation and deflation

components of GDP

consumption, investment, government purchases, and net exports

natural rate of unemployment

the unemployment rate that exists when the economy is at potential GDP

full employment

the level of employment reached when there is no cyclical unemployment but unemployment still exists.

discouraged workers

individuals who would like to work but have given up looking for a job.

leakages

The savings, taxes and import spending that remove spending from the circular flow of income.

injections

The investment, government spending and export revenues that add spending to the circular flow of income.

investments

Assets purchased with the goal of providing additional income from the asset itself.

capital

An economic system based on private property and free enterprise.

intermediate goods

goods used in the production of final goods.

disinflation

a reduction in the rate of inflation.

deflation

A situation in which prices are declining.

stagflation

A period of falling output and rising prices.

production possibilities curve

A graph that describes the maximum amount of one good that can be produced for every possible level of production of the other good.

gross domestic product

The sum total of the value of all the goods and services produced in a nation.

GDP

C + I + G + NX

net national product

A measure of all goods and services produced by a country in a year, including production from its investments abroad, minus the loss or degradation of natural resource capital as a result of productivity.

national income

The total income of an economy, often used interchangeable with the value of aggregate output.

personal income

Salaries and wages as well as investment income and government payments to individuals.

standard of living

Quality of life based on ownership of necessities and luxuries that make life easier.

specialization

Goods and services are produced in better quality, quantity and speed when people focus on producing a few things instead of making everything they want by themselves.

household production

Doing something in the home without pay that takes raw materials along with a family member's skill, experience, knowledge, and household equipment, to produce a useful product or service.

economic shocks

rise and fall of global housing market; financial sector collapse; global recession.

interest rates

Percentage that is applied to your debt.

price level

the average of all prices in the economy.

classical economic theory

The view that an economy will self-correct from periods of economic shock if left alone.

GDP

counts only FINAL goods and services ; does not count intermediate goods and secondhand goods.

GDP

can be calculated in 2 ways:

-add all consumption, investment and government expenditures plus net exports

-add all the incomes received by owners of the productive resources in the economy

producer price index (PPI)

measure of the changes in price over time that US producers charge for their goods and services.

unanticipated inflation

savers, lenders, and people on fixed incomes are hurt by this, borrowers gain from this.

cyclical unemployment

unemployment that rises during economic downturns and falls when the economy improves (BAD unemployment).

measuring employment

the labor force includes: those who work/look for word, does NOT include: elderly, military, those unable to work, kids

Real GDP in 1 year

(nominal GDP x 100) / price index

underemployed workers

people who work part time (might be over-qualified for their job) because they cannot find full-time jobs.

recovery

(expansion) A period of renewed economic growth followed by a recession or depression.

recession

(contraction) A slowdown in a nation's economy.

peak

real output, GDP, is at its highest point of the business cycle.

trough

the lowest point of real GDP reached during the business cycle. If this is particularly deep, it may be called a depression.

depression

economic situation where the level of output falls to especially low levels and unemployment climbs to very high levels relative to the historical average.

Real GDP

nominal/price index x 100

Index #

current/base x 100

GDP Deflator

nominal/real x 100

output growth

real GDP year 1 - real GDP year 2 / real GDP year 1 x 100

Price change

change in CPI / beginning CPI x 100

GDP doesn't include

leisure time

GDP does include

inventory, C + I + G + NX

GDP

same as nations income

most expensive aspect of GDP

consumer spending

least expensive aspect of GDP

exports - imports

Per capita GDP

A measure of the total output of a country that takes the gross domestic product (GDP) and divides it by the number of people in the country.

Nominal GDP

GDP measured in current prices

GDP Deflator

a measure of the price level calculated as the ratio of nominal GDP to real GDP times 100

inelastic

coefficient < 1

inferior good

if people's incomes increase, the consumption of this product won't be affected

producer price index

a measure of the cost of a basket of goods and services bought by firms

increase employment and unemployment

more people in the labor force

inflation rate

the percentage rate of change in price level over time

automation

led to increase unemployment of skilled workers

Labor force participation rate (LFPR)

labor force/adult population x 100

market basket

a representative collection of goods and services

unemployment increases

point inside curve will move closer to the origin