AP Economics unit 2

Macroeconomics

study of the large economy as a whole

Private sector

part of the economy controlled by individuals

public sector

part of the economy controlled by the government

factor payments

payment for the factors of production, such as rent, wages, interest, and profit

transfer payment

when the government redistributes income

subsidies

government payments to businesses

GDP

the value of all goods and services produced in a country in a year

GDP per capita

GDP / population ; good measure of standard of living

productivity

amount of output produced per unit of input

intermediate goods

goods which become an input for another product

nonproduction transactions

economic transaction that does not result in the production of New goods or services (stocks or used goods)

nonmarket transactions

household production and illegal activities

Consumer spending (C)

purchases of final goods and services by individuals - 70% GDP

durable goods

long term purchases like a car or dishwasher

non-durable goods

products which are used up quickly, like food or clothes

examples of services

dental work, auto repair, tutoring, etc.

investment spending (I)

business spending on tools and equipment - 16% GDP

inventories

goods produced and held in storage in anticipation of later sales

government spending (G)

government spending in the public sector - 17% GDP

Net exports

annual exports - inports, included in GDP

Unemployment

when workers are actively searching for a job but aren’t working

Labor Force

All members of a population over 16 currently employed or unemployed

exceptions to labor force

anyone under 16, must be able and willing, institutionalized persons, in military, school, or retired

frictional unemployment

temporary unemployment or between jobs

seasonal unemployment

frictional unemployment due to time of year (think teachers)

structural unemployment

changes in the labor force leave some skills obsolete

cyclical unemployment

unemployment caused by a recession ; hurts the economy

Natural rate of unemployment (NRU)

frictional + strucutral unemployment, 4-6% when the economy is healthy

discouraged workers

individuals which have given up looking for a job, no longer in labor force

underemployed workers

someone who wants more hours but can’t get them

inflation

rising general level of prices, reducing purchasing power

deflation

decrease in general prices or negative inflation, decreases GDP

Market Basket

a fixed sample of consumer goods used to measure inflation over time

Consumer price index (CPI)

statistical measure of inflation / cost of living using market baskets over time

Nominal values

values measured in current prices

real values

values adjusted for inflation from a base year

substitution bias

idea that CPI overstates true inflation

Nominal wage

wage measured by dollars

real wage

wage adjusted for inflation

recession

a six month period of decline in real GDP

recovery

a period of economic growth and increasing real gdp

positive output gap

when actual output is above full employment output

negative output gap

when actual output is below full employment

Percent change in GDP formula

(current GDP - Base GDP / Base GDP) x 100

Expenditures approach to GDP formula

C + I + G + X_n

Unemployment Rate formula

( # unemployed / # in labor force) x 100

Consumer Price Index formula

(Cost of market basket in current year / cost of market baskets in base year) x 100

Inflation Rate formula

(New CPI - Old CPI / old Cpi) x 100

GDP deflator formula

(nominal GDP / real GDP) x 100

nominal GDP formula

(real GDP x GDP deflator) / 100