ap macro unit 2

2.1 - 2.2

• circular flow model

  • 2 economic actors: households and businesses

  • 2 markets in economy

    • product market: businesses provide goods and services to households, households provide sales to business

    • factor market: resources are bought and sold; land, labor, capital, and entrepeneurship are sold to businesses from households; businesses provide wages, rent, interest, and profit in return

  • money flow - dollars flowing around being used to purchase goods and services

  • real flow - economy

  • money flow helps real flow move more freely

  • for a free market economy

  • us has the government involved - gov buys goods and services and factors of production. provides public goods to all and charges taxes to pay for them

  • leakages:

    • when money exits the circular flow

    • imports, savings (not being spent), taxes to gov (pulls money out)

  • injections:

    • when money enters the circular flow

    • exports, loans, government spending

  • spending in product = income in factor

• gross domestic product

  • total value of all goods and services produced within a country in a calendar year (only final goods, not intermediate goods)

  • value added approach:

    • adds contributions a country’s firm makes to the final goods

    • sales from domestic minus payments to foreign firms

  • income approach:

    • rent, wages, interest, and profit added together

    • sum of all payments for factors of production

    • disposable income: personal income minus taxes

  • output expenditure model:

    • c + i + g + nx (exports minus imports)

    • c | consumption — all goods and services purchased by consumers

    • i | gross investment — primarily business purchases of physical capital and changes in inventories. unexpected increase = probably a recession. houses r investment. net investment = gross investment minus depreciation

    • g | government purchases — expenditures where the gov receives a good or service from their spending (i.e. no social security etc)

    • n | net exports — x minus m, exports minus imports

  • what isnt counted?

    • used goods

    • intermediate goods (no double counting)

    • financial transactions (e.g. stocks and bonds, grants and loans)

    • transfer payments (e.g. food stamps)

  • limitations

    • per capita gdp = gdp / population

    • higher per capita gdp = higher standard of living

    • underground economy: illegal transactions are not counted, cash, etc

    • non market activities / household production

    • bads counted as goods - pollution of natural resources and clean up will count as positive

    • income distribution - not reflected in gdp

2.3

• the labor force

  • people who are either unemployed or employed