AP MACRO UNIT 2

These flashcards cover key terms and concepts from the lecture notes on Economic Indicators and the Business Cycle.

Macroeconomics

The study of the large economy as a whole, analyzing total output, employment, and other indicators across all industries.

Gross Domestic Product (GDP)

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

Expenditures Approach

A method to calculate GDP by adding up all spending on final goods and services produced in a given year.

Income Approach

A method to calculate GDP by adding up all income earned from selling all final goods and services produced in a given year.

Factor Payments

Payments for the factors of production, including rent, wages, interest, and profit.

Circular Flow Model

A diagram that illustrates the flow of resources and goods in an economy, showing the relationship between households and businesses.

Consumer Spending (C)

Approximately 70% of U.S. GDP; spending by individuals on final goods and services.

Business Investment (I)

Approximately 16% of U.S. GDP; spending by businesses on tools, equipment, and structures.

Government Spending (G)

Expenses made by the government for goods and services, approximately 17% of U.S. GDP, excluding transfer payments.

Net Exports (X-M)

Exports minus imports, which contributes approximately -3% to U.S. GDP.

GDP Per Capita

GDP divided by the population, providing an average economic output per person.

Transfer Payments

Payments made by the government to individuals for which no goods or services are received in return, such as welfare or social security.

Negative Output Gap

A situation where actual output is less than potential output, typically associated with recession.

Positive Output Gap

A situation where actual output exceeds potential output, often leading to inflation.

Subsidies

Government financial assistance to businesses to encourage production or lower prices.

Real GDP

GDP adjusted for inflation, reflecting the true value of goods and services in constant dollars.

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

Value-added approach

Add up the dollar value added at each stage of the production process

Consumer spending + Investment + Government spending + Net exports

What is included in the expenditures approach?

Wages + rent + interest + profit

What is included in the income approach?

Unemployment

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

Unemployment Rate

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

(number of unemployed/number in labor force) x 100

What is the unemployment rate formula?

Frictional unemployment

Type of employment that occurs when workers are temporarily without a job while transitioning between jobs or entering the workforce (e.g. individuals fired who are looking for jobs, college students looking for jobs)

Structural unemployment

Type of unemployment that occurs due to changes in the labor force making some skills obsolete (e.g. VCR repairman)

Cyclical unemployment

Type of unemployment caused by a recession or economic downturn, where overall demand for goods and services declines, leading to job losses.

Natural Rate of Unemployment (NRU)

Frictional and structural employment; amount of unemployment that exists when the economy is healthy and growing

Underemployed and discouraged workers

What does the official unemployment rate ignore/neglect?

Inflation

The rising general level of prices which reduces the purchasing power of money

Investment and GDP

High inflation leads to a decrease in…

Price indices

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

Consumer Price Index (CPI)

A measure of inflation which measures the cost of a select market basket of goods and services

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

What is the Consumer Price Index (CPI) formula?

Lenders

Who is hurt by inflation?

Borrowers

Who is helped by inflation?

Nominal wage

Wage measured by dollars rather than purchasing power

Real wage

Wage adjusted for inflation

expansion of money supply

What causes hyperinflation?

Hyperinflation

An unexpectedly excessive and rapidly increasing rate of inflation

GDP deflator

The price index that measures the average price level of the goods and services that make up GDP

(nominal GDP/real GDP) x 100

What is the GDP deflator formula?

(GDP deflator x real GDP)/100

What is the formula for nominal GDP?

Nominal GDP

GDP measured in current prices. It does not account for inflation from year to year

(New GDP deflator - Old GDP deflator) / Old GDP deflator

What is the inflation rate formula?