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.