AP Macro - Unit 2 - Economic Indicators and the Business Cycle

Circular Flow Model

A diagram that traces the flow of resources, products, income, and revenue among economic decision makers. All spending must equal all income.

Deflation

A general decrease in prices. The purchasing power of a currency increases.

Inflation

A general rise in prices. The purchasing power of a currency decreases.

Subsidy

A government payment that supports a business or market.

Resource (Factor) Market

A market in which households sell and firms buy resources or the services of resources.

Gross Domestic Product (GDP)

A measurement of the total goods and services produced within a country. Its a measure of final output of the economy

Income Approach

A method of computing GDP that measures the income-wages, rents, interest, and profits-received by all factors of production in producing final goods and services. Wages + Rent + Interest + Profits

Expenditure Approach

A method of computing GDP that measures the total amount spent on all final goods and services during a given period. C + I + G + (X-M)

Disinflation

A reduction in the rate of inflation from year to year.

Consumer Price Index (CPI)

An index of the cost of all goods and services to a typical consumer. Basket Price in any Year/Basket Price in the Base Year x 100

Inflationary/Positive Output Gap - Business Cycle

Any point where actual output is above the potential/full employment output. Only structural and frictional unemployment.

Recessionary/Negative Output Gap - Business Cycle

Any point where actual output is under the potential/full employment output. All three types of unemployment.

Structural Unemployment

Changes in the labor force that make some skills obsolete. Non-transferable worker skills. Caused often by technology.

Nominal GDP Formula

Deflator x Real GDP/100

The Business Cycle

Fluctuations in economic activity, such as employment and production.

GDP per Capita

GDP divided by population.

Real GDP (in terms of price)

GDP measured in constant prices.

Nominal GDP (in terms of price)

GDP measured in current prices.

Purchasing Power

How much of a good or service your money can buy.

Discouraged Workers

Individuals who would like to work, but have given up looking for a job.

Costs of Unexpected Inflation (Lenders vs. Borrowers)

Lenders are hurt. The currency they are getting paid back has less purchasing power. Borrowers benefit. The currency they are paying back has less purchasing power.

Natural Unemployment Rate (NRU)

NRU = Frictional + Structural Unemployment Cyclical unemployment is not included in the NRU.

Rate of Change

New - Old/Old x 100

Real GDP Formula

Nominal GDP/GDP Deflator x 100

GDP Deflator

Nominal GDP/Real GDP x 100

Transfer Payments

Payments by the government to households for which the government does not receive a new good or service in return. Unemployment payments, social security, welfare, etc.

Frictional Unemployment

Temporary unemployment or being between jobs. Quitting, getting fired, graduating from school.

Actual GDP/Output

The current level of output on the business cycle. (the line that curves up and down)

Potential GDP/Output

The level of output that can be produced when there is "full employment" (NRU). Also represents the LRAS.

Product Market

The market in which households purchase the goods and services that firms produce.

Unemployment Rate

The percentage of the labor force that is unemployed. # of People Unemployed/# of People in the Labor Force

Labor Force Participation Rate

The percentage of the working-age population in the labor force. Labor Force/Population x 100

Labor Force

The total number of workers, including both the employed and the unemployed.

Cyclical Unemployment

Unemployment caused by a recession (economic downturn).

Underground Economy

Unreported legal and illegal activities that do not show up in GDP statistics.