Unit 2 Economic Indicators & the Business Cycle AP Macroeconomics Mrs. Miller

Flashcards covering GDP concepts, inflation, unemployment, CPI, and the business cycle from the lecture notes.

What are the three major economic goals highlighted for all countries in Unit 2?

Promote economic growth, limit unemployment, and keep prices stable (limit inflation).

Name the two approaches to calculating GDP and state whether they yield the same result.

Expenditure approach (C + I + G + NX) and Income approach; both yield the same GDP because every dollar spent is income.

How is GDP defined?

The total market value of all final goods and services produced within a country in one year.

List some transactions that do not count toward USA GDP.

Transfer payments, stocks and bonds, services provided for no money, intermediate goods, foreign-produced goods, old/used goods, black market/under-the-table payments.

What are the four components of GDP in the Expenditure Approach?

Consumption, Investment, Government Spending, Net Exports (X - M).

What does Net Exports equal?

Exports minus Imports.

If Debbie spends $200 on dinner, which GDP component increases?

Consumption increases by $200.

If Sasha buys a $1,800 laptop built in China, what happens to Investment, Net Exports, and GDP?

Investment increases by $1,800, Net Exports decrease by $1,800, and GDP remains unchanged.

If Jane buys a $1,200 computer that is last year’s model from a local manufacturer, what happens to current GDP and investment?

No change in current GDP and no new investment; GDP remains unchanged.

If General Motors builds $500 million worth of cars but consumers buy only $470 million, what happens to GDP components and total GDP?

Consumption rises by $470 million; Inventory Investment rises by $30 million; GDP rises by $500 million.

What is Nominal GDP?

GDP measured using current year prices; not adjusted for inflation.

What is Real GDP?

GDP measured using base-year prices; adjusted for inflation.

How do you calculate Real GDP using base-year prices?

Real GDP = sum of base-year prices times current-year quantities for all final goods and services.

What is the GDP deflator?

A price index that measures the overall price level of all final goods and services in GDP; = (Nominal GDP / Real GDP) × 100.

How is the inflation rate calculated from the GDP deflator?

Inflation rate = (GDP Deflator current year − GDP Deflator base year) / GDP Deflator base year × 100.

What is Real GDP per capita?

Real GDP divided by the total population; measures average output per person and standard of living.

What is the difference between Nominal GDP and Real GDP?

Nominal GDP uses current prices; Real GDP uses base-year prices and is inflation-adjusted.

What is CPI?

Consumer Price Index; measures average changes in prices paid by consumers for a fixed market basket; base year value is 100.

How is CPI calculated?

CPI = (Cost of basket in current year) ÷ (Cost of basket in base year) × 100.

What does CPI indicate when it rises or falls?

Rising CPI indicates inflation (lower purchasing power); falling CPI indicates deflation (more purchasing power).

What are the four common shortcomings of the CPI?

Substitution bias, new products, changes in product quality, changing prices; COLA adjustments can be misestimated.

What is the difference between CPI and the GDP deflator?

CPI measures prices of consumer goods with a fixed basket; GDP deflator measures prices of all domestically produced goods/services with a changing basket.

Which indexes are typically used to assess inflation versus output growth?

CPI measures inflation and cost of living; GDP deflator measures changes in overall price level of GDP and output.

What are the three types of unemployment?

Frictional, Structural, Cyclical.

What is NRU and how is it calculated?

Natural Rate of Unemployment = Frictional + Structural.

What does full employment mean in terms of unemployment?

Only the natural rate of unemployment exists; there is no cyclical unemployment.

Why is the unemployment rate not always an accurate measure?

Discouraged workers, underemployment, race/age inequalities, illegal labor.

What is inflation, deflation, and disinflation?

Inflation is rising price levels; deflation is falling prices; disinflation is inflation that is decreasing (slower).

What is COLA and why is it used?

Cost of Living Adjustment; wage increases tied to inflation to preserve purchasing power.

What are the CPI and GDP deflator relationships in the Perdue Farms, John Deere, and Armani examples?

1) If Perdue Farms raises chicken prices, both CPI and GDP deflator rise. 2) If John Deere raises tractor prices domestically, GDP deflator rises but CPI unchanged. 3) If Armani raises jeans prices, CPI rises but GDP deflator unchanged.

What is the difference between the base year value of CPI and the CPI in other years?

The CPI base year value is set to 100; other years show the current price level relative to that base.