AP Macroeconomics Unit 2

How do you calculate the inflation rate?

% change in prices = (year 2 - year 1)/(year 1) x 100

How do you calculate the GDP Deflator?

(Nominal GDP)/(Real GDP) x 100

What is the formula to calculate the percent change in GDP?

(year 2 - year 1)/year 1 x 100

Who is in the labor force?

-Above 16 years -Able/willing to work -Not institutionalized (jail/hospital) -Not in military, in school full time, or retired

Who is helped by unanticipated inflation?

-Borrowers (people who borrow money) -A business where the price of the product increases faster than the price of resources

What is NOT included in GDP?

-Intermediate goods (goods inside final goods) -Non production transactions (stocks, bonds, real estate) -Non market/illegal activities (household production)

Who is hurt by unanticipated inflation?

-Lenders (people who lend money at fixed interest rates) -People with fixed incomes -Savers

Four components of GDP

1. Consumer Spending 2. Investment (business spending on tools/equipment 3. Government spending (NOT transfer payments) 4. Net exports -- exports (x) - Imports (M)

What are the 5 factors of productivity?

1. Economic system 2. Property rights 3. Capital -- countries with it can produce more 4. Human capital (knowledge, education, skills) 5. Natural resources

Income approach adds up

1. Labor income 2. Rental income 3. Interest income 4. Profit Factor payments

Three Major Economic Goals for Every Country

1. Promote economic growth 2. Limit unemployment 3. Keep prices stable (limit inflation)

Problems with the CPI

1. Substitution bias 2. New products 3. Product quality

Causes of Inflation

1. The government prints too much money ---If the government keeps printing money to pay off debts they could end up with hyperinflation 2. Demand - Pull Inflation: Demand pulls up prices -- overheated economy with excessive spending but the same goods 3. Cost - Push Inflation: Higher production costs increase Prices

The US is at full employment when there is what percent unemployment?

4-6%

Income Approach

Add up all the income that resulted from selling all final goods and services produced in a given year -- Labor Income/Rental Income/Interest Income/Profit

Expenditures Approach

Add up all the spending on final goods and services produced in a given year

Substitution Bias

As prices increase for the fixed market basket, consumers buy less of these products an more substitutes that may not be in the market basket CPI may be higher than what consumers are paying

GDP = ?

C + I + G + Xn

Product Quality

CPI ignores both improvements and decline in product quality CPI may suggest prices stay the same through economic well being has improved greatly

Structural Unemployment

Changes in labor force make some skills obsolete Workers DO NOT have transferable skills and these jobs won't come back Permanent loss of jobs = creative destruction Workers must learn new skills

Deflation

Decrease in general prices or a negative inflation rate

What are the criticisms of the unemployment rate?

Discouraged workers: some people are no longer looking for a job because they have given up Underemployed workers: Someone who wants more hours but can't get them is still considered employed

Natural Rate of Unemployment (NRU)

Frictional + structural unemployment The amount of employment that exists when the economy is healthy and growing

Why is zero percent unemployment not our goal?

Frictional/structural unemployment are present always because people will always be between jobs or replaced by technology

GDP Per Capita

GDP divided by the population. It identifies on average how many products each person makes Best measure of standard of living

Real GDP

GDP expressed in constant or unchanging dollars -- adjusts for inflation Best measure of economic growth

Nominal GDP

GDP measured in current prices. It doesn't account for inflation from year to year.

Inflation Good, Worry, Bad Percentages

Good: 1-4% Worry: 5-8% Bad: 9% or more

GDP Growth Good, Worry, Bad Percentages

Good: 2.5-5% Worry: 1-2% Bad: .5% or less

Unemployment Good, Worry, Bad Percentages

Good: 6% or less Worry: 6.5-8% Bad: 8.5% or more

Price Indices

Index numbers assigned to each year that show how prices have changed relative to a specific base year (base year given 100)

The Quantity Theory of Money Equation

MV = PY M = money supply V = velocity of money P = price level Y = quantity of output

New Products

Market basket may not include the newest consumer products

Nominal Interest Rates

Percent increase in money that a borrower pays not adjusting for inflation

How do you calculate the unemployment rate?

Percent of people unemployed (# unemployed)/(# in labor force) x 100

Labor Force Participation Rate

Percent of population in the labor force. If people leave the labor force, the unemployment rate falls

Real Interest Rates

Percentage increase in purchasing power that a borrower pays Real = Nominal - Inflation

Disinflation

Prices are increasing at a slower rate

Frictional Unemployment

Temporary unemployment or being between jobs Individuals are qualified workers with transferable skills

Full Employment Output (Y)

The Real GDP created when there is no cyclical unemployment

Gross Domestic Product

The dollar value of all final goods and services produced within a country's borders in one year Most important measure of economic growth

Inflation Rate

The percent change in prices from year to year Can use CPI to calculate this

Inflation

The rising in the general level of prices and it reduces the "purchasing power" of money

Seasonal Unemployment

Type of frictional unemployment which is due to time of year and the nature of the job

Technological Unemployment

Type of structural unemployment where automation and machinery replace workers

Cyclical Unemployment

Unemployment caused by a recession As demand for goods/services falls, demand for labor falls and workers are fired "Demand deficient unemployment"

Real Wage

Wage adjusted for inflation Inflation -- workers have to ask their boss for a raise

Nominal Wage

Wage measured by dollars rather than in purchasing power

National Income Accounting

When economists collect statistics on production, income, investment, and savings

Wage - Price Spiral

Workers ask for higher wages businesses have to increase prices to pay wages then workers have to ask for higher wages to pay higher prices and it continues

Unemployment

Workers that are actively looking for a job but currently aren't working