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

payment for the factors of production, namely rent, wages, interest, and a profit

transfer payments

when the government redistributes income (ie: welfare, social security)

subsidies

government payments to businesses

Gross Domestic Product

what GDP stands for

GDP

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

year 2 - year 1 / year 1 × 100

percent change formula

GDP per capita

GDP divided by the population

productivity

output per unit of input

intermediate goods, nonproduction transactions, nonmarket and illegal activities

3 things NOT included in GDP

unemployed

people who are currently seeking a job but are not able to get one

Unemployment Rate

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

number unemployed / number in labor force x 100

unemployment rate formula

labor force

anyone working or seeking work

kids, those not wanting to work, those unable to work, and military

those not counted in “total population” when calculating labor force

frictional, structural, cyclical

three types of unemployment

frictional unemployment

temporary unemployment / being in between jobs

currently employed + currently unemployed

labor force formula

structural unemployment

changes in the labor force makes some skills obsolete

cyclical unemployment

unemployment caused by a recession

rapid inflation

super low unemployment is associated with what?

frictional and structural

the natural rate of unemployment only includes what two types of unemployment?

4-6%

typical natural rate of unemployment

full employment

the maximum level of sustainable production

full employment output

the real GDP created when there is no cyclical unemployment

discouraged workers

some people no longer looking for a job because they have given up

underemployed workers

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

recession / depression

typically a 6 month period of decline in Real GDP

inflation

rising general level of prices and the reducing of the “purchasing power” of money

deflation

decrease in general prices or a negative inflation rate

disinflation

prices increasing at slower rates

market baskets

inflation rate

the percent change in prices from year to year

prices indices

index numbers assigned to each year that show how prices have changed relative to a specific year

consumer price index

the most commonly used measurement of inflation

price of market basket / price of market basket in base year x 100

CPI formula

substitution bias, new products, product quality

problems with the CPI

substitution bias

as prices increase for the fixed market basket, consumers buy less of these products and more substitutes that may not be part of the market basket (result: CPI may be higher than what consumers are really paying)

new products

the CPI market basket may not include the newest consumer products (result: CPI measures prices but not the increase in choices)

product quality

the CPI ignores both improvements and decline in product quality (result: CPI may suggest that prices stay the same though the economic well being has improved significantly)

lenders, people with fixed incomes, savers

who is hurt by inflation?

nominal wage

a wage measured by dollars rather than purchasing power

real wage

wages adjusted for inflation

menu costs, show leather costs, unit of account costs

3 main costs of inflation

menu costs

costs money to change listed prices

shoe leather costs

the costs of transactions increase

unit of account costs

money doesn’t reliably measure the value of goods/services

disproportionality

people with fixed incomes or less financial resources may feel the effects more sharply

nominal GDP

GDP not adjusted for inflation, measured in current prices

real GDP

GDP expressed in constant, or unchanging, dollars. Adjusts for inflation

GDP Deflator

measures the prices of all goods produced

CPI

measures prices of only goods and services brought by consumers

nominal GDP / real GDP x 100

deflator formula

deflator x real GDP / 100

nominal GDP

nominal GDP / deflator x 100

real GDP