AP Macroeconomics Unit 2 (GDP, Inflation, Unemployment)

GDP Deflator

A tool used to measure changing price of ALL goods and services in a country. Also used to remove price change from nominal GDP

Real GDP (definition)

Measure of economic output that is adjusted for inflation (inflation removed from the calculation)

Nominal GDP

Measure of economic output that is not adjusted for inflation. Current year's production measured with current year's prices.

Inflation

A general rising of price level in an economy

Gross Domestic Product (GDP)

The dollar value of all goods and services produced within a country in a given year.

GDP Formula (What IS included in GDP)

Consumption + Investment + Government Spending + Net Exports

Net Exports

Exports - Imports

Transfer Payments

A payment made in which no goods or services are produced. Not counted in GDP.

Intermediate Goods

A good that is used to produce a final or finished good. Not re-counted in GDP.

Things that are NOT Included in GDP

Intermediate goods, used goods, black market/illegal activity, non-market activity, transfer payments

What GDP Doesn't Measure

Quality of life, quality of goods being made, negative effects of disasters/storms

GDP per Capita formula

(GDP / population) x 100

Real GDP formula (if given index/deflator)

Real GDP = (nominal GDP / index) x 100

Real GDP formula (if not given index/deflator)

Real GDP = (this year's production) x (base year price)

Nominal GDP formula (if not given index/deflator)

Nominal GDP = (this year's production) x (this year's price)

GDP Deflator formula

GDP Deflator = (nominal GDP / real GDP) x 100

Real GDP (why it matters)

Best measure of a country's economic growth

Real GDP per Capita (why it matters)

Best measure of a country's standard of living

Growth Rate formula

( (Later Year - Earlier Year) / Earlier Year ) x 100

Causes of Economic Growth

New resources, new labor (immigration, for example), increase in capital stock, increased productivity, technology advances, better trained/educated workers

Effects of Economic Growth

Better goods/services, higher wages, more leisure time, economy meeting people's "wants"

100

The value of the base year for any price index (GDP Deflator or CPI)

The GDP Deflator is 200 and nominal GDP is $50 billion. What is real GDP?

$25 billion

Nominal GDP is $5,000 and the price index is 125. What is real GDP?

$4,000

Nominal GDP grew by 8%, and the GDP Deflator increased by 10%. What is the change in real GDP?

-2%

Nominal GDP grew by 11% while 4% inflation occurred. What is the growth of real GDP?

7%

Nominal GDP is $480 million and the price index is 120. What is real GDP?

$400 million

Deflation

A general decrease in price level in a country

Interest rate

The price of getting a loan. Money on top of the original loan amount paid to the person/institution you borrowed from.

These people are HURT by inflation

Lenders who loan at fixed rates; people with fixed incomes; people who save cash

These people are HELPED by inflation

People who borrow at fixed rates; lenders who loan at adjustable rates; people who have Social Security (which does have a "cost of living" increase most years)

Purchasing Power

The VALUE of money you have, not just the number on the bill itself

Consumer Price Index (CPI)

The average price of a specific "market basket" of SOME goods and services that the average person in the US buys. Used to see year-to-year inflation for consumer goods.

Problems with the CPI

Slow to recognize changing products, doesn't move with buyer preferences (ex: sales on one product but not another), ignores product quality and how that influences buyers

The Consumer Price Index (CPI) for 2014 was 235. The base year of 1982 had a CPI of 100. By how much did prices increase?

135%

If the CPI for 2015 is 120 and the CPI for 2016 is 480. By what percent did the CPI grow by?

300%

Acceptable level of annual inflation in the US

1 -2%

Acceptable level of unemployment in the US

4-5%

Characteristics of economic expansion

Real GDP increasing; unemployment decreasing; stable inflation (1-2%)

Characteristics of economic contraction (or recession)

Real GDP decreasing for 6 months; unemployment rising; deflation occurring

Unemployed Worker

A person who is not currently working, but is actively looking for work.

Labor Force

Anyone over the age of 16, who is NOT in the military, NOT in a mental institution, NOT in jail is part of this.

Unemployment rate (%) formula

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

Discouraged Workers

People who are not currently employed, and have GIVEN UP looking for work. Not counted as unemployed.

Frictional unemployment

Temporary unemployment caused by changing from one job to another, or getting a first job;

Structural unemployment

Unemployment caused by changing technology or needs; "no skills to pay the bills"

Cyclical unemployment

Unemployment caused by a recession or economic downturn; jobs that may not come back, due to a decrease in consumer demand (for example)

Natural Rate of Unemployment ("formula" / idea)

Acceptable level of unemployment for a country.

Structural unemployment + frictional unemployment.

Full Employment Output

Real GDP (real production) of a country when it is at the Natural Rate of Unemployment (or full employment)

Underemployed worker

A person working part-time when they could be/want to be working full time, or at a job below their training/skill level