AP Macroeconomics Unit 2 Vocabulary

Gross Domestic Product (GDP)

The total market value of all final goods and services produced within a country’s borders in a given period.

Circular Flow Model

A diagram showing how money, goods, and resources flow through the economy between households, businesses, government, and the foreign sector.

Gross National Product (GNP)

The total value of all final goods and services produced by a country’s residents, regardless of where they are located.

Factors of Production

The inputs used to produce goods and services—land, labor, capital, and entrepreneurship.

Product Market

The market where goods and services are sold by businesses and purchased by households.

Resource Market

The market where households sell resources (like labor, land, and capital) to businesses.

Consumption

Spending by households on goods and services for personal use.

Expenditures Approach

A method of calculating GDP by adding up total spending on final goods and services: GDP = C + I + G + (X – M).

Income Approach

A method of calculating GDP by summing all incomes earned in the production of goods and services—wages, rent, interest, and profit.

Value

added Approach

Economic Well

being

Intermediate Goods

Goods used as inputs in the production of final goods; not counted directly in GDP to avoid double counting.

Final Goods

Goods and services purchased by the final user; included in GDP.

Nonmarket Transactions

Economic activities not recorded in the market (e.g., household work, volunteer services); excluded from GDP.

Underground Economy

Economic activity that is unreported to the government and not included in GDP (e.g., illegal trade or unrecorded cash work).

Unemployment Rate

The percentage of the labor force that is unemployed but actively seeking work.

Labor Force

The total number of people employed and unemployed who are actively seeking work.

Frictional Unemployment

Temporary unemployment experienced by people changing jobs or entering the workforce.

Structural Unemployment

Unemployment caused by a mismatch between workers’ skills and the needs of employers.

Cyclical Unemployment

Unemployment that rises during economic downturns and falls when the economy improves.

Seasonal Unemployment

Unemployment that occurs when industries slow or shut down for a season.

Labor Force Participation Rate

The percentage of the working

Full Employment Rate

The level of employment where there is no cyclical unemployment; only frictional and structural unemployment remain.

Natural Rate of Unemployment

The unemployment rate that exists when the economy is producing at its potential output (sum of frictional + structural unemployment).

Inflation

A sustained increase in the general price level of goods and services.

Consumer Price Index (CPI)

A measure that examines the weighted average of prices of a basket of consumer goods and services.

Inflation Rate

The percentage change in the CPI (or price level) over time.

Real (Value)

A value adjusted for inflation, reflecting true purchasing power.

Deflation

A sustained decrease in the general price level of goods and services.

Disinflation

A reduction in the rate of inflation; prices rise more slowly.

Demand

pull Inflation

Aggregate Demand (AD)

The total quantity of goods and services demanded across all levels of an economy at a given price level.

Aggregate Supply (AS)

The total quantity of goods and services that producers in an economy are willing and able to supply at different price levels.

Cost

push Inflation

Inflationary Spiral

A cycle where higher prices lead to higher wages, which then lead to even higher prices.

Nominal GDP

GDP measured in current prices; not adjusted for inflation.

Real GDP

GDP adjusted for inflation; reflects true changes in output.

GDP Deflator

A price index measuring the change in prices of all goods and services included in GDP.

Real GDP Per Capita

Real GDP divided by the total population; measures average economic output per person.

Recession

A period of declining economic activity, typically defined as two consecutive quarters of falling real GDP.

Expansion

A period of increasing economic activity and rising GDP.

Peak

The highest point in the business cycle before a downturn.

Contraction

A phase of the business cycle where economic activity slows down.

Trough

The lowest point in the business cycle before recovery begins.

Recovery

The phase following a trough where economic growth resumes.

Depression

A prolonged and severe recession with high unemployment and large declines in output.

Output Gap

The difference between actual output (real GDP) and potential output.

Actual Output

The current level of real GDP in the economy.

Potential Output

The level of GDP that could be produced if the economy were operating at full employment.