AP Macro: Unit 2 Measuring the Economy
unemployment rate
# unemployed workers / labor force x 100 rate does not include: discouraged workers, marginally attached workers, and the underemployed
cyclical unemployment
(related to business cycle) unemployment that results from economic downturns, or recessions as demand for goods fall, demand for labor falls and workers are fired (ex. steel workers laid off during Great Depression) -deviation of actual rate of unemployment from natural rate
stocks and bonds
-contribute to household income via an indirect ownership of physical capital -the income households receive from factor markets includes profit distributed to company shareholders and interest payments on any bonds that they hold
2 GDP Calculations
1) expenditure approach / aggregate spending (C + I + G + N = GDP) 2) add all incomes received by owners of productive resources in the economy / add all incomes from selling final goods -both ways generate the same amount since every $ is a $ of income
product quality
CPI ignores improvements and declines in product quality CPI may suggest that prices stay the same though economic well being has improved significantly
new products
CPI market basket may not include newest consumer products CPI measures prices but doesn't increase in choices
inflation rate
annual % change in an official price index (usually CPI) inflation rate = (price index in year 2 - price index in year 1) / (price index in year 1) x 100
financial markets
banking, stock, and bond markets which channel private savings and foreign lending into investment spending, gov't borrowing, and foreign borrowing -receives funds to provide funds
physical capital
buildings / machinery that increases worker productivity
GDP per capita
calculation: GDP / size of population = avg. GDP / person useful bc 1) indicates standard of living 2) compares labor productivity between 2 countries
natural rate of unemployment
certain amount of unemployment is natural, and actual employment fluctuates around this normal level natrual / normal unemployment rate around which the actual unemployment rate fluctuates, arising from effects of FRICTIONAL + STRUCTURAL
substitution bias
consumers may buy more substitutes that may not be part of market basket, thus CPI may be higher than what consumers are really paying
private savings
disposable income not spent on consumption
GDP includes
domestically produced final goods and services: capital goods, new construction of structures, changes to inventories
real GDP
evaluate if GDP would have increased if prices had not changed (more accurate reflection of economic expansion and contraction) GDP calculated as if prices had stayed constant at the level of some given base year
net exports
exports minus imports
CFE: factor market
firms that buy resources needed to produce goods and services -households SUPPLY: money from consumer spending (on goods and services) -businesses PROVIDE: money to pay for factors of production
natural unemployment
frictional + structural (NFS)
3 types of unemployment
frictional, structural, and cyclical unemployment
country with high GDP per capita vs low GDP per capita
good lifestyle vs not so good lifestyle
intermediate goods and services
goods and services bought from one firm by another firm to be used as inputs into the production of final goods and services ex: automobile manufacturer purchases glass from a glassmaker
imports
goods and services purchased from other countries
exports
goods and services sold to other countries
final goods and services
goods and services sold to the final / end user
inflation: helped and hurt
helped: borrowers (able to repay loans with lower real value funds) hurt: lenders (borrows repay loans with funds that have a higher real value)
market basket
hypothetical set of consumer purchases of goods and services used to measure changes in the overall price level
human capital
improvement of labor created by education and knowledge embodied in workforce increase education = increase human capital
hyperinflation
increase inflation at an abnormal rate
nominal interest rate
interest rate that is actually paid for a loan, unadjusted for the effects of inflation
GDP does not include
intermediate goods and services inputs used / secondhand goods stocks and bonds foreign produced goods and services
bond
loan in the form of IOU (signed doc acknowledging debt) that pays interest
CFE: product market
markets for final goods and services -households PROVIDE: factors of production -businesses SUPPLY: goods and services
aggregate price level
measure of overall level of prices in the economy through the price index, which measures inflation (cost of market basket in given year / cost of market basket in base year x 100)
PRODUCER price index (PPI)
measures changes in prices of goods and services purchased by producers good indicator of inflation rate changes bc responds to inflation / deflation quickly used to track economy wide price changes
price index
measures cost of purchasing a given market basket index value normalized, equal to 100
CONSUMER price index (CPI)
measures the cost of the market basket of a typical urban American family index value = 100, not a % CPI = price of market basket / price of market basket in base year x 100
structural unemployment
more people seek jobs than jobs available the changes in the structure of labor force makes some skills obsolete (perhaps replaced by technology), thus workers must learn new skills to get a job -factor: minimum wage = as price of labor increases, more workers are willing to supply labor even though employers demand less labor
actual unemployment
natural + cyclical (ANC)
real interest rate
nominal interest rate minus the rate of inflation adjusted for the effects of inflation better measurement of money being borrowed / lent bc depends on actual rate of inflation, impacting both borrowers and lenders
discouraged workers
nonworking but capable people who have given up looking for a job bc job market is in a bad state
underemployed
people who work part time because they cannot find full-time jobs
marginally attached workers
people who would like to be employed and have looked for a job in the past but are not currently looking for work
structural unemployment: creative destruction
permanent loss of jobs bc outdated ex. VCR repairment
nominal GDP
preliminary number released every 3 months GDP that is calculated with prices current in the year -allows people to focus solely on changes in quantity of output by eliminating the influence of changes in prices
GDP deflator
price measure that is equal to 100 times the ratio of nominal GDP for that year to real GDP in for that year expressed in prices of a selected base year
disinflation
process of brining the inflation rate down
depression (severe slow down)
real GDP decreases by more than 10%
recession (general slow down)
real GDP decreases for two or more quarters -illustrating decreased production and increased unemployment
inflation
rising general level of prices the dollar loses its value
how to increase GDP per capita
rising productivity: amount of output produced by avg. worker increases steadily
stock
shares in ownership of a company
circular flow of the economy (CFE) model
simple model of macroeconomy that shows the transactions encompassing 2 FLOWS 1. flows of physical items (ex. goods, services, raw materials) 2. flows of money that pays for physical items *flow of money INTO the CFE = flow of money OUT
frictional unemployment: seasonal unemployment
specific type of frictional unemployment due to time of year and nature of job ex. professional Santa Claus impersonator
investment spending
spending on new productive physical capital ex. machinery, structures, changes in inventories -inventories included bc they change the ability of a firm to make future sales
inventories
stocks of goods and raw materials help to facilitate business operations ex. in an automobile company: machinery, welding robots, finished cars
3 problems with CPI
substitution bias new products product quality
labor force
sum of unemployed and employed (labor force / population 16 and older x 100)
long run growth
sustained rise in quantity of goods and services that an economy produces
technology
technical means for the production of goods and services
aggregate output
total amount of output produced and supplied in an economy for a given period
disposable income
total income that households have left AFTER paying taxes and receiving gov't transfers (ex. unemployment insurance payments)
aggregate spending
total spending on domestically produced final goods and services in the economy C + I + G + N = GDP (consumption, investment, gov't expenditures, net exports)
gross domestic product (GDP)
total value of all final goods and services produced in the economy during a given year -measure of a country's aggregate output
frictional unemployment
unemployment due to the time workers spend in job search usually short term and temporary ex. high school grads looking for a job