AP Macroeconomics - Overview of Section 3 - Chapters 10-15

Households

The sector that provides factors of production to firms.

Firms

The sector that provides goods and services to households.

Factors of production

Land, labor, and capital provided by households to firms.

Goods and services

What firms provide to households in the circular flow model.

GDP measurement methods

Production, income, and expenditure.

GDP equation

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

C in GDP equation

Consumption

I in GDP equation

Investment

G in GDP equation

Government spending

X in GDP equation

Exports

M in GDP equation

Imports

Investment spending in GDP

Business spending on new equipment, structures, and inventories; and household spending on new homes.

Double counting in GDP

Counting the same good multiple times in different stages of production.

Disposable income

Income households have left after paying taxes and receiving transfers.

Nominal GDP

Measured at current prices.

Real GDP

Adjusted for inflation.

Real GDP calculation

Real GDP = (Nominal GDP / Price Index) × 100

GDP per capita

The average income or output per person in a country.

GDP per capita calculation

GDP per capita = Total GDP ÷ Population

Labor force

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

Labor force participation rate

(Labor Force ÷ Adult Population) × 100

Discouraged workers

People who have stopped looking for work because they believe no jobs are available for them.

Unemployment rate calculation

(Number of Unemployed ÷ Labor Force) × 100

Underemployed

Working part-time or below one's skill level when full-time work is desired.

Frictional unemployment

Temporary unemployment as people move between jobs.

Structural unemployment

Unemployment caused by a mismatch between workers' skills and job requirements.

Cyclical unemployment

Unemployment caused by downturns in the business cycle.

Natural rate of unemployment

The sum of frictional and structural unemployment when the economy is at full employment.

Cyclical unemployment calculation

Actual Unemployment - Natural Rate = Cyclical Unemployment

Actual unemployment

The total unemployment rate including cyclical, structural, and frictional.

Labor unions effect on unemployment

They can increase wages, which may lead to higher unemployment if firms hire fewer workers.

Minimum wage increase effect

It can increase unemployment if the wage floor is above the market equilibrium.

Nominal interest rate

The stated rate of interest before adjusting for inflation.

Real interest rate

Nominal interest rate - inflation rate.

Unit of account

It measures and compares the value of goods and services.

Shoe leather costs

The time and effort spent to avoid holding money during inflation.

Menu costs

The costs businesses face from changing prices (like reprinting menus or price tags).

Unexpected inflation beneficiaries

Borrowers.

Unexpected inflation victims

Lenders and people on fixed incomes.

Market basket

A fixed collection of goods and services used to track price changes over time.

Consumer Price Index (CPI)

A measure of the average change in prices paid by consumers for goods and services.

Price index calculation

(Cost of Market Basket in Current Year ÷ Cost of Market Basket in Base Year) × 100

Inflation rate calculation

[(New CPI - Old CPI) ÷ Old CPI] × 100

Disinflation

A decrease in the rate of inflation.

Deflation

A decline in the general price level of goods and services.

High inflation rate indication

A decrease in the purchasing power of money.