AP Macro Unit 2

GDP

the dollar value of all final goods and services produced within a country in one year

3 macro economic goals

• low unemployment

• low inflation

• economic growth

what is not included in gdp

• intermediate goods

• nonproduction transactions

• nonmarket and illegal activities

GDP Calculuation

C+I+G+(X-M)

unemployment

is the measure of the number of people who are actively seeking work but unable to find employment. It is a key indicator of economic health.

unemployment rate

(number unemployed / number in labor force)100

labor force participation rate 

number labor force / population

labor force 

sum of employed and unemployed people in the society must be at least 16, able and willing to work, not institutionalized, not in military, school full time or retired

frictional unemployment

temporary unemployment or being in between jobs 

• seasonal unemployment is a specific type 

structural unemployment

changes in the market make some skills obsolete

• technological unemployment is a type of structural

cyclical unemployment

caused by a recession

natural rate of unemployment (NRU)

sum of frictional and structural unemployment

if there is only frictional and structural unemployment then the economy is at its potential real output

criticisms of unemployment rate

• discouraged workers 

• underemployed workers 

consumer price index

index that calculates the cost of a market basket of goods purchased by a typical family its purpose is to track changes in the cost of living over time

most commonly used measurement of inflation

market basket

the combination of goods that are used to calculate CPI

• Price of goods * Quantities

Base year & Subsequent Year 

Price Quantity / Price * Base year Quantities  

CPI Calculation

100(cost of current basket / cost of base year basket)

Inflation

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

inflation rate

% change in price over a period of time

deflation

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

disinflation

a slowing rate of inflation

inflation rate

new CPI - old CPI / old CPI

nominal

variables that have not been adjusted for inflation

Real

variables that have been adjusted for inflation

real wage

(nominal wage / (CPI /100))

shortcomings of CPI

• substitution bias

• product quality

• intro to new goods

unanticipated inflation

• when the price level increases more than expected

• hurt: lenders, people with fixed income & savers

• helped: borrowers

unanticipated disinflation

• when the price level increases slower than expected

• hurt: borrowers

• helped: lenders

• leads to more purchasing power

unanticipated deflation

• when the price level decreases when it was expected to increase

nominal GDP

a measure of how much is spent on an output in a given period

the value of aggregate output in current prices

(P of current year * Quantity of current year) sum of that for all goods and services counted in the GDP

OR. real gdp ( aggregate price level / 100)

real gdp

is the measure of how much output is produced in a given period

the value of aggregate output in constant dollars

summing Price of base year * Quantity of the current year

= ( nominal GDP / aggregate price level ) 100

GDP deflator

measures the changes in prices of all goods and services produced in an economy in given period which tells us the aggregate price level

can be used to convert nominal gdp to real gdp or vice versa

using GDP Deflator = 100 ( nominal gdp / real gdp )

nominal gdp = (gdp delfator * real gdp)/100

real gdp = 100(nominal gdp/gdp deflator)

inflation rate = 100 ((gdp deflator y2 - gdp deflator y1)/gdp deflator y2)