Ap Macro Unit 2 Review

Economics & Key Indicators

• Economics assesses economic health via indicators like GDP, unemployment rate, and the Consumer Price Index (CPI, measuring inflation).
• The circular flow model illustrates interactions between households, businesses, and the government.
• GDP: Dollar value of all final goods/services produced in a country in one year.

Unemployment

• Three types: frictional, structural, and cyclical.
• Full employment: absence of cyclical unemployment.

Real vs. Nominal GDP

• Real GDP: adjusted for inflation.
• Nominal GDP: not adjusted for inflation.

Circular Flow Model & Factor Payments

• Households provide factors of resources to businesses.
• Factor payments: income for factors of production (wages for labor, rent for land, interest for capital, merits for entrepreneurship).
• Transfer payments: government payments without exchange of goods/services (welfare, unemployment benefits).

Economic Goals

• Economic growth, limiting unemployment, and price stability.

Measuring GDP

• Expenditure Approach: $GDP = C + I + G + XN$ (consumer spending, investment, government spending, net exports).
  • Excludes transfer payments.
• Value Added Approach: Sum of additional value at each production stage.
• Income Approach: Sum of all income in goods/services production.

GDP Exclusions

• Used goods.
• Intermediate goods.
• Non-legal actions.
• Stocks and bonds.

Labor Force

• Includes individuals aged 16+ who are employed or actively seeking employment.
• Excludes full-time students, stay-at-home individuals, and those who have given up seeking work.

Labor Force & Unemployment Rate

• Labor force participation rate: $\frac{\text{Number in labor force}}{\text{Working-age population}} \times 100$
• Unemployment rate: $\frac{\text{Number unemployed}}{\text{Number in labor force}} \times 100$

Types of Unemployment

• Frictional: temporary, between jobs
• Structural: due to advancements/changes in the workforce
• Cyclical: due to recession (not in natural rate of unemployment)
• Natural rate of unemployment: frictional + structural unemployment

Consumer Price Index (CPI)

• CPI: average change over time in prices paid by consumers for a basket of goods/services.
• CPI Equation: $\frac{\text{Value of basket in a given year}}{\text{Value of basket in base year}} \times 100$
• Inflation: prices going up
• Deflation: prices going down
• Disinflation: prices going up at a slower rate
• Substitution bias: CPI doesn't account for consumers switching to cheaper substitutes.

Inflation Winners and Losers

• Hurt by inflation: lenders lending at a fixed rate
• Benefit from inflation: borrowers with fixed-rate loans

GDP Deflator

• Measures price changes of all goods/services produced in a country.
• GDP deflator: $\frac{\text{Nominal GDP}}{\text{Real GDP}} \times 100$

Business Cycle

• Potential GDP: straight line on a graph.
• Real GDP: curved line fluctuating around potential GDP.
  • Trough: lowest point (economy at its weakest).
  • On the line: full employment (no cyclical unemployment).
  • Peak: highest point (high inflation, economy overheating).