AP Macroeconomics: Economic Indicators and the Business Cycle

Vocabulary flashcards covering core macroeconomics concepts including the circular flow model, GDP calculation and limitations, unemployment types and metrics, and inflation indicators.

Households

Economic agents in the circular flow model that own the factors of production and consume goods and services.

Firms (Businesses)

Economic agents in the circular flow model that hire factors of production and produce final goods and services.

Resource (Factor) Market

The market in the circular flow model where households supply factors of production (land, labor, capital, entrepreneurship) and firms provide factor payments (rent, wages, interest, profit).

Product Market

The market in the circular flow model where firms supply goods and services and households provide consumer spending and expenditures.

Gross Domestic Product (GDP)

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

Intermediate Goods

Goods utilized in the production of final goods, which are excluded from GDP calculations to prevent double counting.

Expenditure Approach

The method of calculating GDP by adding all spending components: $\text{GDP} = C + I + G + NX$.

Gross Private Investment ($I$)

Business spending on capital purchases, commercial real estate, new residential housing construction, and changes in inventory.

Net Exports ($NX$)

The component of GDP calculated by subtracting imports ($M$) from exports ($X$).

Non-Market Activities

Productive and domestic tasks excluded from GDP because they do not occur in traditional markets, such as unpaid domestic work, caregiving, and DIY home repairs.

Underground Economy

Unreported or illegal economic transactions, such as off-the-books labor and illegal trade, that are excluded from GDP.

Unemployed

An individual who is without a job, available to work, and has actively sought employment within the past $4$ weeks.

Labor Force

The total number of employed and unemployed individuals in an economy: $\text{Labor Force} = \text{Employed} + \text{Unemployed}$.

Discouraged Workers

Individuals who have given up looking for a job and are consequently excluded from both the count of the unemployed and the labor force.

Unemployment Rate

The percentage of the labor force that is unemployed, calculated as $\left( \frac{\text{Unemployed}}{\text{Labor Force}} \right) \times 100$.

Labor Force Participation Rate (LFPR)

The percentage of the civilian adult population that is in the labor force, calculated as $\left( \frac{\text{Labor Force}}{\text{Civilian Adult Population (16+)}} \right) \times 100$.

Frictional Unemployment

Temporary unemployment experienced by individuals who are transitioning between jobs or searching for a position that best matches their skills.

Structural Unemployment

Unemployment caused by a mismatch between workers' skills and the needs of employers, often driven by technological advancements or structural shifts in the economy.

Cyclical Unemployment

Unemployment directly caused by economic downturns, recessions, or a general decline in aggregate demand.

Natural Rate of Unemployment (NRU)

The baseline level of unemployment present when the economy is at full output, equal to the sum of frictional and structural unemployment: $\text{NRU} = \text{Frictional Unemployment} + \text{Structural Unemployment}$.

Full Employment

The economic state where cyclical unemployment is $0\%$ and the actual unemployment rate equals the natural rate of unemployment (typically between $4\%$ and $6\%$).

Inflation

A general and sustained increase in aggregate price levels over time, which diminishes the purchasing power of money.

Deflation

A sustained decrease in the general or aggregate price levels of an economy.

Disinflation

A slowing of the rate of inflation, where overall price levels are still increasing, but at a reduced pace.

Consumer Price Index (CPI)

A measure of the average change over time in prices paid by urban consumers for a standardized market basket of consumer goods and services relative to a base year: $\text{CPI} = \left( \frac{\text{Cost of Market Basket in Current Year}}{\text{Cost of Market Basket in Base Year}} \right) \times 100$.

Substitution Bias

A limitation of the CPI where it overstates true inflation by using a fixed market basket that ignores consumers shifting to cheaper alternative goods as prices rise.