AP Macro Unit 2

Non-production transactions

Financial transactions (nothing produced) and used goods (goods produced outside of the year we are calculating)

How to Calculate Real GDP

Multiply the amount of each good produced by the base year prices

Depression

an extreme or severe recession with excessive unemployment and Real GDP contraction

Economic expansion

any period of real GDP growth, accompanied by a decrease in the unemployment rate

Economic contraction

any period of real GDP reduction, accompanied by an increase in the unemployment rate

Intermediate goods

goods used in the production of final goods

Peak

highest rate of Real GDP expansion before Real GDP begins to contract

How does inflation affect lenders and borrowers?

- Lenders will be hurt by unanticipated inflation because the money they get paid back with has less purchasing power. - Borrowers, on the other hand, benefit from unanticipated inflation because the money they payback is worth less than the money they borrowed.

How to Calculate Nominal GDP

Multiply the amount of each good produced by the price in that particular year.

Deflation

The general decrease of prices in a market or aggregate economy over time

Shoe leather costs

the cost of time and effort that people end up spending to counteract the effects of inflation

CPI Formula

Current Market Basket/Base Year Market Basket X 100

Environment

If a factory is polluting during production they are still adding to GDP, but GDP does not separate the costs of this pollution from the actual production, even if the pollution is negatively impacting human life and ecology.

Value-added approach

Involves calculate the value-added of any good or service by determining the difference between the cost of inputs to production and the price of output at any particular stage in the overall production process

Population

When populations are different from country to country and the countries are producing a similar amount of a product, it gives us an inaccurate picture of the standard of living because one country is taking the same amount of production and distributing it amongst a larger population.

Cyclical unemployment

Workers who are unemployed because their jobs have been lost due to economic contraction. Jobs will return when economic conditions improve and grow.

Inflation

the general rising of prices in a market or aggregate economy over time

Trough

the highest rate of Real GDP contraction before Real GDP begins to expand

Recession

two straight fiscal quarters (6 months) of Real GDP contraction

Total Adult Population: 1600 Full-time workers: 600 Part-time workers: 120 Unemployed: 80 Discouraged workers: 20 Assume that 50 of the 80 unemployed workers also become discouraged workers. Calculate the new unemployment rate.

80-50/800-50= 30/750= 0.4 or 4%

Total Adult Population: 1600 Full-time workers: 600 Part-time workers: 120 Unemployed: 80 Discouraged workers: 20 What is the equation for calculating the unemployment rate?

80/800=0.1 or 10%

Total Adult Population: 1600 Full-time workers: 600 Part-time workers: 120 Unemployed: 80 Discouraged workers: 20 What is the labor force participation rate?

800/1600=50%

If the CPI for a given year is 90 then the change in prices between that year and the base year is

90/100 X 100=90 (100-90)/100=0.1 or 10%

Wealth redistribution

- Involves the real value of wealth being transferred from one group to another. (i.e. borrowers and lenders) - When people are considering lending or borrowing money, they will take into consideration the expected inflation rate. If that is different than anticipated, that affects the amount of interest that is repaid or earned.

Labor force participation rate

- Measure of an economy's active workforce. - total number of workers employed or actively seeking employment/total number of the working-age population

Unemployment rate

- Percentage of unemployed workers in the total labor force. - # unemployed/total number of people in the labor force.

Menu costs

- Result from a firm having to change prices. - As inflation occurs within our economy, businesses are forced to change any business-related materials that have prices on them like a menu as a result.

Income approach

- Sum of aggregate income earned on all inputs used in the product market to make goods and services in one year - GDP= Wages (W) + Rent (R) + Interest (I) + Profit (P)

Expenditures approach

- Sum of all aggregate spending on all final goods and services within a country's borders in one year - GDP= Consumption Spending (C) + Investment Spending (I) + Government Spending (G) + (Exports-Imports) (X-M)

Fully explain why "full employment" does not mean 0% unemployment.

- The US is at full employment when there is 6% unemployment. - Full employment is when there is no cyclical unemployment, which represents economic instability. - Full employment includes frictional and structural unemployment because they are signs of a healthy and growing economy.

What is GDP?

- The dollar value of all final goods and services produced within a country's borders in one year

What is the consumer price index?

- The most commonly used measurement of inflation for consumers - Measures the weighted average of prices of a basket of consumer goods and services that are typically bought by your average household

Inflation rate

- The percent change in aggregate price level across an entire economy in one year - IR= (MB Now- MB Y1)/MB Y1 X 100

What is the circular flow diagram based upon?

- Voluntary exchange, the act of firms and consumers gathering freely in economic markets to achieve beneficial exchange in order to maximize their economic incentives. - In the factor market, firms are demanding and consumers are supplying. In the product market, the consumers are demanding are firms are supplying.

Explain the difference between the expenditures approach and income approach using an example.

- When using the expenditures approach, GDP is money spent by a consumer on a particular good/service. For example, if a consumer walks into a Subway and purchases a sandwich for $5, then that $5 would be added to the overall GDP. - When using the income approach, instead of adding what the consumer paid for the sandwich to the GDP we would use the value of the worker's pay.

Frictional unemployment

- Workers who are temporarily unemployed or currently in between jobs. - Ex. Seasonal unemployment, in which particular types of jobs can only be done during a certain time of the year.

Structural unemployment

- Workers who are unemployed because their skills have become obsolete - Ex. Technological unemployment, in which a company replaces a worker with a machine to complete a production task

GDP Deflator

- a measure of the price level used to convert nominal numbers to real numbers - nominal GDP/real GDP X 100

What are the 2 methods of calculating GDP?

1) Expenditures approach 2) Income approach 3) Value-added approach

What is not included in the GDP?

1) Intermediate goods 2) Non-production transactions 3) Nonmarket and illegal activities

Costs of Inflation

1) Menu costs 2) Shoe leather costs 3) Loss of purchasing power 4) Redistribution of wealth

What 2 markets are illustrated in the circular flow diagram?

1) The Factor (resource) Market: where factors of production are exchanged 2) The Product Market: where economic goods and services are exchanged

Assume the value of a market basket for a given year is $550 and the same basket in the base year was $500. Calculate the CPI.

550/500 X 100=110

Total Adult Population: 1600 Full-time workers: 600 Part-time workers: 120 Unemployed: 80 Discouraged workers: 20 What is the number of workers in the labor force?

600+120+80=800

What does the circular flow model show?

The circular flow model shows how households, businesses, and the government interact. Businesses sell goods and services to households in the product market and households sell resources to businesses in the resource market. Public goods and services are provided by the government.

What is the circular flow diagram?

A graphical representation of how goods, services, and money flow through our economy between consumers and firms.

What is investment spending?

Any spending done by businesses. NOT an investment in the stock market or other investment vehicles.

Nominal GDP vs. Real GDP

Nominal- the dollar value of all final goods and services produced within a country's borders in one year not adjusted for inflation Real- the dollar value of all final goods and services produced within a country's borders in one year adjusted for inflation

What happens to the unemployment rate when full-time workers involuntarily become part-time workers? Explain.

Nothing because they are still counted as employed

Loss of purchasing power

Occurs because inflation causes the value of the individual dollar to decrease over time

Limitations of GDP

PIES: 1) Population 2) Inequality 3) Environment 4) Shadow Economy

Shadow economy

Production of items that are not reported so they are not counted in the GDP. For example, the black market is deemed illegal and therefore excluded from formal reporting, but there are many other aspects of the shadow economy which are perfectly legal.

In the base year, ____

Remember in the base year the nominal GDP and real GDP are the same number. When calculating the GDP Deflator for the base year you will find that it is always equal to 100.

Why are discouraged workers not included in the unemployment rate?

They are not willing to work.

Nonmarket and illegal activities

Things Made at Home: Nonmarket activities- types of services that are done but that do not receive payment Illegal goods and services- anything not allowed by current laws and regulations

Natural rate of unemployment

Total amount of frictional and structural unemployment; present at all times because some people will always be between jobs or replaced by technology.

Inequality

Two countries can have the same GDP per capita but if income is not evenly distributed to all families then it is not an accurate measure of production and economic stability. In the unequal society, the market will be less resilient and the governing bodies will be less sustainable due to famine, conflict, and unemployment.

Does the new unemployment rate after the increase in discouraged workers overstate or understate the actual level of joblessness in the economy? Explain.

Understates the actual level of joblessness because discouraged workers are not counted as unemployed.

What is GDP used for?

Used to compare ourselves to other countries, see the impact of policy changes, and compare our growth from year to year

Examples of transfer payments

Welfare checks and subsidies to businesses