Unit2_ Economic Indicators & The Business Cycle

UNIT 2: Economic Indicators & The Business Cycle

  • AP Macroeconomics

  • AP Exam Weighting: 12-17%

UNIT 2.1: Circular Flow & GDP

  • AP Macroeconomics

Circular Flow Model

  • Households (Individuals)

    • Provide factors of production

    • Spend money in product markets

  • Firms (Organizations)

    • Produce goods and services

    • Generate revenue from product markets

  • Market Interactions

    • Households -> Firms: Provide resources + Spend Money

    • Firms -> Households: Produce goods + Services + Pay wages

Gross Domestic Product (GDP)

  • Definition: Total market value of all final goods and services produced within a country in a given year.

  • Purpose: Measure economic growth.

GDP as Total Expenditure

  • Components of GDP Calculation:

    1. Consumer Spending (Households)

    2. Investment Spending (Businesses)

    3. Government Spending

    4. Net Exports (Exports - Imports)

  • Breakdown:

    • Imports: Goods produced abroad and consumed domestically.

    • Exports: Goods produced domestically and consumed abroad.

  • Formula: GDP = C + I + G + (X - M)

Examples of GDP Components

  • Consumer Spending Examples:

    • Buying a new iPhone

    • Paying for a haircut

  • Investment Spending Examples:

    • Companies purchasing factory machines

    • Building office buildings

  • Government Spending Examples:

    • Building highways

    • Hiring teachers

Not Included in GDP

  1. Underground transactions (e.g., illicit trade)

  2. Used goods

  3. Financial transactions (e.g., transfers)

  4. Intermediate goods

  5. Non-market transactions (e.g., DIY work)

Measuring GDP

  • Can be measured by:

    • Expenditure Approach: Total spending on goods and services.

    • Income Approach: Total income earned from producing goods and services.

Importance of GDP

  • Measures Economic Health: Growing GDP indicates a healthy economy.

  • Comparison Between Countries: Helps gauge relative wealth and growth.

  • Standard of Living: Higher GDP typically means better quality of life.

Limitations of GDP (UNIT 2.2)

  • Non-Market Transactions: Ignores unpaid work and volunteer efforts.

  • Underground Economy: Accounts for unrecorded economic activity.

  • Environmental Damage: GDP can increase with detrimental environmental practices.

  • Income Inequality: Does not reflect income distribution.

  • Happiness & Well-being: GDP does not measure quality of life.

Broken Window Fallacy (Illustration)

  • GDP measures spending but not opportunity costs; funds spent on repairs could have been spent on better investments.

Unemployment (UNIT 2.3)

  • Full Employment: All labor resources are being used efficiently.

  • Labor Force: Comprises employed and actively seeking unemployed individuals.

    • Not Included: Retirees, students, and discouraged workers.

  • Types of Unemployment:

    1. Frictional: Between jobs or entering the market.

    2. Structural: Due to skill obsolescence or shifts in demand.

    3. Cyclical: From downturns in the economy.

  • Unemployment Rate (UR) Calculation: UR = (Unemployed / Labor Force) × 100

Key Concepts Review

  1. Labor Force: Total number of employed and unemployed (actively seeking).

  2. Types of Unemployment: Frictional, Structural, Cyclical.

  3. Unemployment Rate (UR): Percentage of labor force that is unemployed but seeking work.

  4. Full Employment: Operating at the natural unemployment rate (4-5%).

Price Indices & Inflation (UNIT 2.4)

  • Price Level: Average prices of goods/services in the economy.

  • Price Stability: Gradual changes in prices are preferred for economic health.

  • Inflation: A sustained rise in the price level; affects purchasing power.

  • CPI (Consumer Price Index): Measures overall price changes relative to a base year.