AP Macro Unit 2

Gross Domestic Product (GDP)

the market value of the final production of goods and services within the geographic borders of a country in a given period

Expenditures Approach to GDP

one of the three approaches to calculating GDP that involves adding up all spending on final goods and services in an economy; categories this spending into five categories: consumption, investment, government spending, exports, and imports: Y=C+I+G+X-M

Income Approach to GDP

an approach to calculating GDP that involves adding up all of the income earned within the borders of a country in a given year; adds up wages, rents, interest, and profits.

Value-Added Approach to GDP

an approach to calculating GDP that involved adding up all of the value added at various stages of production

Final Goods/Services

the goods and services that are purchased by consumers, businesses, the government, or other countries in their final form for their intended final use.

Intermediate Goods

goods that are used in the production of a final product.

Consumption (C)

when using the expenditures approach, the category of GDP that is spending by households on final goods and services in a given year but excludes spending on new housing.

Investment (I)

when using the expenditures approach, the category of GDP that is spending businesses do in order to produce goods and services (buy computers for accountants to use or build factories to build cars); includes spending on capital goods (tools, equipment) and inventory.

Government Spending (G)

when using the expenditures approach, spending by government entities, on goods and services such as building roads and national defense; note that transfer payments are not included in “government spending” in GDP

Transfer Payment

any payment by a government to a household that is not in exchange for a good or service; for example, sending a retired person a pension check

Exports (X)

goods that are produced in one country and then sold within another country.

Imports (M)

goods that are produced in a different country than where they were purchased.

Net Exports (X-M)

spending on exports minus spending on imports.’ There is a trade deficit when imports are higher than exports and there is a trade surplus and when exports are higher than imports.

Quality of Life

(sometimes called “well-being”) the standard of health, happiness, security, and material comfort of an individual, a group of people, or a nation.

Non-Market Transactions

economic activity that takes place in the informal sector (babysitting, lawn mowing, illegal drug sales), sometimes called gray market or black market economy; not recorded, taxed, or officially monitored by the government; not included in the calculation of a nation’s GDP.

Income Inequality

when a disproportionate share of a nation’s income is earned by a small minority of households; GDP does not account for income distribution in any way.

Sustainability

the ability of a system to endure indefinitely into the future; an increase in GDP will only be sustainable as long as it does not deplete natural resources too rapidly nor exploit the environment in a way that diminishes the quality of life of the nation’s households over time.

Economic Bads

any outcome from economic activity that creates negative value for society, such as air pollution from cars that harms human health and the environment; unsustainable economic growth may diminish the quality of life of a nation’s people.

Real GDP per Capita

the real gross domestic product of a nation, divided by the nation’s population; this measure is an indication of the average income of a nation’s people

Depreciation of Capital

the decrease in the value of a nation’s capital stock over time; GDP accounts for investment in new capital but does not subtract the lost value of depreciated capital. Because of this, GDP may overstate the amount of economic activity in nations with rapidly depreciating capital stocks.

Human Development Index (HDI)

a composite measure of nation’s social and economic development developed by the United Nations that includes measures of health, wealth, and education.

Genuine Progress Indicator (GPI)

a measure of a nation’s quality of life that includes the income and output measured by gross domestic product. This measure subtracts out the costs of negative effects related to economic growth such as crime, environmental degradation, resource depletion, and the costs of climate change. GPI nets the positives and negatives of economic activity to provide a more accurate measure of a nation’s quality of life than GDP alone.

Happy Planet Index (HPI)

a measure of a nation’s quality of life that includes survey results on happiness, life expectancy at birth, the degree of inequality across society, and the ecological footprint.

Unemployment

when people are not working, but they are actively looking for work.

Unemployed

a term that describes a person who could be working, and wants to work, but is not working.

Unemployment Rate

the percentage of the labor force that is unemployed.

Labor Force

the number of people in a population who are either employed or unemployed.

Eligible Population

these are the people deemed likely to be in the labor force (in US, over 16 and not institutionalized nor in military).

Labor Force Participation Rate

the percentage of the eligible population that is in the labor force.

Discouraged Workers

people who do not have a job, but they will take a job if offered one. However, they have given up looking for work, so they are not counted in the labor force.

Underemployed

people who work part-time, but they really want to work full time if they could find a full-time job.

Full Employment Output

(AKA full employment real output) the amount of output that is produced in an economy when that economy is using all of its resources efficiently; on country’s PPC

Natural Rate of Unemployment

the unemployment rate that exists when an economy is producing the full employment output; when an economy is in a recession, the current unemployment rate is higher than the natural rate. During expansions, the current unemployment rate is less than the natural rate.

Frictional Unemployment

the component of the natural rate of unemployment that occurs because the job search process is not instantaneous.

Structural Unemployment

unemployment that occurs as a result of a structural change in the economy, such as the development of a new technology or industry.

Cyclical Unemployment

the unemployment associated with the recessions and expansions; this can have a positive or negative value.

Inflation

a sustained increase in the overall price level in the economy, which reduces the purchasing power of a dollar

Inflation Rate

the pace at which the overall price level is increasing; this is the percentage increase in the price level from one period to the next.

Deflation

a sustained decrease in the overall price level in the economy; deflation occurs if the inflation rate is negative.

Disinflation

a slowing of the rate of inflation; for example if the rate of inflation is 5% in 2016 and 3% in 2017, there is still inflation in 2017.Prices are just not rising as fast as they were before.

Aggregate Price Level

a single number that summarizes all prices in an economy; price indices are frequently used to represent the aggregate price level.

Price Index

a measure that calculates the changing cost of purchasing a particular (and unchanging) combination of goods (called a “market basket”) each year; the consumer price index and the producer price index are examples.

Consumer Price Index

an index that calculates the cost of a market basket of goods purchased by a typical family that lives in an urban area; the purpose of the CPI is to track changes in the cost of living over time.

Market Basket

the combination of goods that are used to calculate a price index; the goods stay the same from year to year.

Base Year

a reference year to which variables are compared; US’s is currently 1983

Real Variables

variables that are adjusted for the rate of inflation that represent the true value of something (such as real interest, real income, or real GDP).

Nominal Variables

variables such as wages, income, or interest that have not been adjusted for the rate of inflation

Purchasing Power

what can actually be bought with money; if you have $10 and want to purchase $1 apples, ____ of $10 is 10 apples, if apples are $2, ____ is 5 apples (has decreased),

Real Interest Rate

the interest rate earned that reflects the actual purchasing power of that interest; for example if a bank pays 3% interest, but there is 2% inflation, you really have only gained 1% interest because the purchasing power of your interest has decreased.

Unanticipated Inflation

when the price level increases at a faster pace than expected; for example, if you think that the rate of inflation will be 5%, but it turns out to be 8%.

Unanticipated Disinflation

when the price level increases at a slower pace than anticipated; for example, if you think the rate of inflation will be 5%, but it turns out to be 2%.

Unanticipated Deflation

when the price level decreases when it was expected to increase; for example, if you think the rate of inflation will be 2%, but it turns out to be -2%.

Wealth Redistribution

when the real value of wealth is transferred from one agent to another; when inflation is higher than borrowers and lenders expected, wealth is transferred from lenders to borrowers.

Lender

an agent (usually a bank) or a person (for example, a holder of a bond) who makes money available to another agent, with the agreement that the money will be repaid (usually with interest).

Borrower

an agent that has received money from another agent with the agreement that the money will be repaid (usually with interest).

Saver

an agent that is not spending some of their income.

Bond

an asset that is a promise to pay a fixed amount at some point in the future.

Nominal GDP

the market value of the final production of goods and services within a country in a given period using that year’s prices (also called “current prices”).

Real GDP

nominal GDP adjusted for changes in the price level, using prices from a base year (constant prices) instead of “current prices” used in nominal GDP; adjusts the level of output for any price changes that may have occurred over time.

GDP Deflator

a price index used to adjust nominal GDP to find real GDP; the GDP deflator measures the average prices of all finished goods and services produced within a nation’s borders over time.

Base Year

the year used for comparison in the determination of price changes using the GDP deflator price index; the deflator in this is always equal to 100.

Current Prices

the prices at which goods are sold in a nation in a particular year; used when calculating nominal GDP.

Constant Prices

the prices from a base year that are used to calculate real GDP in other years; more accurate measure of how a country’s actual output changes over time, cancels out any changes in the price level between years.

Business Cycle Model

a model showing the increases and decreases in a nation’s real GDP over time; this model typically demonstrates an increase in real GDP over the long run, combined with short-run fluctuations in output.

Aggregate Demand

the total demand for a nation’s output, including household consumption, government spending, business investment, and net exports

Aggregate Supply

the total supply of goods and services produced by a nation’s businesses.

Expansion

the phase of the business cycle during which output is increasing.

Recession

the phase of the business cycle during which output is falling.

Depression

a deep and prolonged recession

Peak

the turning point in the business cycle between an expansion and a contraction; during this in the business cycle, output has stopped increasing and begins to decrease.

Trough

the turning point in the business cycle between a recession and an expansion; during this in the business cycle, output that had been falling during the recession stage of the business cycle bottoms out and begins to increase again.

Recovery

when GDP begins to increase following a contraction and a trough in the business cycle; an economy is considered in recovery until real GDP returns to its long-run potential level.

Potential Output

the level of output an economy can achieve when it is producing at full employment; economy has natural rate of unemployment.

Growth Trend

the straight line in the business cycle model, which is usually upward sloping and shows the long-run pattern of change in real GDP over time.

Positive Output Gap

the difference between actual output and potential output when an economy is producing more than full employment output; when there is this, the rate of unemployment is less than the natural rate of unemployment and an economy is operating outside of its PPC.

Negative Output Gap

the difference between actual output and potential output when an economy is producing less than full employment output; when there is this, the rate of unemployment is greater than the natural rate of unemployment and an economy is operating inside its PPC.