Unit 2: AP Macroeconomics

Gross Domestic Product (GDP)

the total value of final goods and services produced in a country in a given year

circular flow model

A graphic representation of how different units of the economy interact

Gross National Product (GNP)

an estimate of total value of all the final products and services turned out in a given period by the means of production owned by a country's residents.

factors of production

land, labor, capital, entrepreneurship

Product markets

Where consumers exchange goods and services with producers

Resource market

where businesses purchase the resources they desire to produce the goods consumers demand

consumption

The money people pay that flows between the household and the product market

Expenditures Approach

Also called the demand approach since it focuses on the demand for goods and services

Income Approach

Measures the total income earned through the factors of production ( GDP=W+R+I+PR)

value added approach

Also called the production approach; it involves determining the value of goods and services and subtracting the goods and services that were used in generating the output

( GDP= Value of production - Value of intermediate goods )

Economic well-being

The material living conditions that people experience and their access to goods and resources

intermediate goods

Ones used to produce final goods

Final good

One sold to the consumer who will actually use it

underground economy

buying and selling of goods and services that is concealed from the government to avoid taxes or regulations or because the goods and services are illegal

nonmarket transactions

economic activity not taking place in the market and, therefore, not included in GDP; such as domestic activities

unemployment rate

The percentage of the labor force who are not working

Labor force

people who are able and willing to work

frictional unemployment

unemployment that occurs when people take time to find a job

structural unemployment

unemployment that results because the number of jobs available in some labor markets is insufficient to provide a job for everyone who wants one

cyclical unemployment

unemployment that rises during economic downturns and falls when the economy improves

seasonal unemployment

unemployment that occurs as a result of harvest schedules or vacations, or when industries slow or shut down for a season

labor force participation rate

( LFPR= Labor force / total population over 16 )

Considered an indication of economic activity; compares the size of the labor force with the number of people who could potentially be part of the labor force

Full employment rate

a condition when anyone who wants to work can get work

natural rate of unemployment

( NRU = (FU+SU) / LF )

A concept formulated to describe the proportion of labor force that remains unemployed during a period of full unemployment

limitations of unemployment rate

1. Discouraged workers

2. Underemployed workers

3. Part-time workers

4. Chronically unemployed workers

Consumer Price Index (CPI)

A measure that tracks the change in the average price of a group of consumer goods and services

Inflation rate

The measure of the change of purchasing power, fluctuated wildly, ranging from below zero to almost 21%

Real variables

Variable whose value is adjusted for and determined by their value in terms of goods and services

Deflation

The opposite of inflation; an overall drop in the price of goods and services

Disinflation

A marginal reduction in the inflation rate over a short period

demand-pull inflation

When consumers increase their demand, producers try to increase the supply; but when additional supply is unavailable, producers increase the price; occurs when aggregate demand increases faster than aggregate supply

CPI limitations

1. Inadequate representation of novelty

2. No acknowledgment of changes in product quality

3. Substitution bias

4. Lack of inclusion of buyer habits

Aggregate demand

The total demand for all finished goods and services that consumers want at current prices

Aggregate supply

The total amount of goods and services suppliers want to supply at those prices

cost-push inflation

Occurs when aggregate supply decreases (anything that increases the cost of production)

Inflationary spiral

When inflation leads to more inflation

Nominal GDP

( GDP=C+I+G+(X-M) )

Unadjusted GDP; quantifies the total value in money, rather than units of production, of all the goods produced in a year

Real GDP

Nominal GDP adjust for inflation and deflation

GDP Deflator

A measurement used to determine price inflation or deflation in relation to a specific year

GDP per capita

( GDP / Population )

A measure of a country's output per person

Recession

Periods of contraction (can last a few months to several years)

Business cycle phases

expansion, peak, contraction, trough

Recovery

The eventual upward direction of the economy following the trough

Depression

A prolonged contraction or recession

Output gap

The difference between the economy's actual output and the potential output

Actual output

what has been achieved in reality

Potential output

How much the economy could ideally produce if it used all its resources, including employees, natural resources, equipment, and technology

Factors that affect the business cycle

1. Monetary policies

2. Natural events

3. Political insecurity

4. Trade barriers

5. Government spending