AP Macro: Unit 2

Private sector

part of the economy that is run by individuals and businesses

Public sector

Part of the economy that is controlled by the government

Factor payments

payments for the factors of production; rent, wages, interest, and profit

Transfer payments

when the government redistributes income

Subsidies

Government payments to businesses

Three goals of macro

1. promote economic growth

2. limit unemployment

3. keep prices stable

GDP

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

GDP per capita

GDP divided by the population, which identifies how many products each person makes. BEST measure of a nation’s standard of living

Economic system

capitalism promotes innovation and provides incentives to improve productivity

Rule of law

countries with political stability have more economic growth

Capital stock

Countries that have more machines and tools are more productive

Human capital

countries that have better education and training are more productive

Natural resources

countries that have more natural resources are more productive

What is not included in GDP?

1. intermediate goods

2. non-production transactions: financial transactions and used goods

3. non-market and illegal activities

Consumer spending

1. durable goods

2. non-durable goods

3. services

Investment

when businesses buy capital

Inventories

Goods produced and held in storage in anticipation of later sales, counted in the year they are produced, not sold

Government

tracks the spending in public sector

Nonmarket transactions

many goods and services produce value but don’t count

Unemployment

workers that are actively looking for a job but aren’t working

Unemployment rate

percent of people in the labor force who want a job but are not working

Who is in the labor force?

1. at least 16 years old

2. able and willing to work

3. not institutionalized

4. not in military, in school full time, or retired

Frictional unemployment

Temporary unemployment or being between jobs, these are qualified workers with transferable skills

Seasonal unemployment

specific type of frictional unemployment

Structural unemployment

Changes in the labor force make some skills obsolete, these workers do not have transferable skills and the jobs don’t come back

Technological unemployment

type of structural unemployment where automation and machinery replace workers

Cyclical unemployment

Unemployment caused by a recession

Natural rate of unemployment

frictional plus structural unemployment; exists when the economy is healthy and growing

What is the difference between NRU and NAIRU?

NRU focuses on output and not having too much unemployment, but NAIRU focuses on inflation and not having too little unemployment

Why does too little unemployment a bad thing?

it can cause prices to rise since consumers spend more and producers bid up the price of resources

Discourged workers

some people give up looking for a job, so they leave the labor force, which causes the unemployment rate to fall

Underemployed workers

someone who wants to work more hours but can’t get them is still considered employed

Race/age inequalities

overall unemployment rate doesn’t show disparity for minorities and teenagers

Inflation

rising general level of prices and it reduces the purchasing power of money

Is inflation good or bad?

Bad because banks don’t lend and people don’t save, which decreases investment and GDP

Deflation

decrease in general prices or negative inflation rate

Why is deflation bad?

people will hoard money and assets, which decreases consumer spending and GDP

Disinflation

prices increasing at slower rates

CPI

Price of market basket/Price of market basket in base year * 100

Substitution bias

as prices increase for the fixed market basket, consumers buy less of these products and more substitutes that may no be part of the market basket

New products

CPI market basket may not include the newest consumer products

Product quality

CPI ignores both improvements and decline in product quality

Who is hurt by inflation?

lenders at fixed interest rates, people with fixed incomes, savers

Who is helped by inflation?

Borrowers, business where the price of the product increases faster than the price of resources

Nominal wage

wage measured by dollars rather than purchasing power

Real wage

Wage adjusted for inflation

Costs of inflation

1. menu costs

2. shoe leather costs

3. unit of account costs

Nominal GDP

GDP measured in current prices that doesn’t account for inflation

Real GDP

GDP is expressed in constant or unchanging dollars; adjusted for inflation

GDP Deflator

measures the prices of all goods produced

GDP deflator vs CPI

GDP deflator measures the prices of all goods produced, but CPI measures the prices of all goods and services bought by consumers

GDP deflator

Nominal GDP/Real GDP *100