AP MACRO UNIT 2

% change in prices

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

Country X's Macroeconomic Data in 2017 Consumption Spending= 13 Employee Compensation (Wages)= 12 Government Spending=3 Interest Payments=1 Investment Spending=4 Net Exports=−1 Profit=5

19 billion dollars

The nation of Kona cultivates coffee beans and cassava, from which all their consumer goods are produced. In 2010, 100 cups of Mocha Coffee cost $2.00 per cup, 50 quarts of sweet pudding cost $1.5 per quart, and 25 packages of Cassava Leaf salad cost $1.00 per package. In 2015, 100 cups of MC cost $2.5 a cup, 50 quarts of SP cost $2.2 a quart, and 25 packages of CLS cost $1.2 a package. 1. Calculate the cost of the marker basket of goods in 2010 and 2015.

2010: $200 +$75 +$25= $300 2015: $250 + $110+ $30=$390

2. (with Kona question) Use 2010 as the base year to calculate the price indices for 2010 and 2015 for the marker basket of goods in the table

2010: CPI=100, b/c base year is always 100 2015: CPI = 130, b/c $390/$300 *100

POPULATION

Norway and Argentina have similar nominal GDP, but the population of Norway is much smaller than Argentina

Government gives welfare to someone

Not counted in GDP b/c is transfer of money

Limitations of GDP

PIES

P

Population

Entrepreneurship

Profit

Factor Payments

Rent, Wages, Interest, Profit

example of discouraged worker

Sara has been unable to find a job and has abandoned her job search

S

Shadow Economy

INEQUALITY

Standard of living depends on income-income distribution doesn't factor into GDP

Natural Rate of Unemployment

The amount of unemployment that normally exists. There will always be structural and frictional unemployment

Consumer price index

The key measure of inflation- the change in the cost of buying a fixed basket of goods and services. Base is 100. Each year is given an index number as well

Which statement is true about the circular flow diagram of an economy?

The market for factors of production connects spending by firms to household income

Nominal GDP

The market value of all financial goods and services produced within a country in a year

Public Sector

The part of the economy ran by the government

Cyclical Unemployment

The result of an economic depression or recession. As demand for goods and services falls, the demand for labour falls and workers are laid off

Labour

Wages

Labour unions negotiated a 3-year contract with employers in the automobile industry. THey agreed to a 3% per year increase in pay over the three years. How would each group be affected by an actual inflation rate of 4% next year?

Workers would be worse off, and the employers would be better off

Does not contribute to GDP

a baker buys eggs that will be used in a cake

National Spending Approach

approach that takes all the goods and services that go into GDP and splits them into consumption, environment, government purchases, and Exports-imports (Net Exports)

Imports

are not included in GDP b/c produced in other country

GDP Deflator

broad measure of price levels in the economy (The index number shows how much prices have changed since base year)

Part-Time workers

count in the employment rate

Slowdown in the rate of increase in the consumer price index

disinflation

Exports

do count in GDP b/c were produced in home country

Limitations of the unemployment rate

does not account for discouraged or the underemployed

What is true about the approaches used to measure the value of a nations GDP

expenditure approach to calculating GDP sums consumption spending, investment spending, gov. spending, and net exports

Capital Goods

goods used to make other goods but are still considered final goods

Goods not on the market

home production, free goods and services, charitable work

Private Sector

households and businesses

To find Nominal GDP

multiple the price times quantity, and add up

to find real GDP

multiply price in base year * quantity in current year

The percent change in nominal income to have the same standard of living in previous years

needs to match inflation rate

Difference between nominal gross domestic product and real gdp

nominal GDP uses current prices to measure the value of final output while real gdp uses constant prices

Discouraged workers

not counted in the unemployment rate b/c they left the labour force

Old house on the market

not included in GDP b/c was already sold before

circular flow matrix

shows how products, resources, and money flows around the economy

Which type of unemployment describes the situation of factory workers displaced by an automation?

structural

If The actual rate of unemployment is below the NRU,

the actual real output is greater than real output

As a measure of economic performance, the US GDP accounts for what?

the cleanup of an oil spill

The output gap is measured by which of the following

the difference between actual and potential gdp

The lower the unemployment,

the higher the real output.

Inflation rate

the percent change in over a year or period of time

When an economy is at the trough of the business cycle, which of the following is true then about the state of the economy?

there is a recessionary gap

What will happen when the actual inflation rate exceeds the expected inflation rate

this will harm lenders with fixed interest rate loans

Labour Force

# of people actively looking for a job or have a job, must be over 16 and not institutionalised

LFPR

(# in labour force/ working age population) *100

Unemployment Rate=

(# of unemployed/# in labour force) * 100

Produced goods

Goods produced this year

Intermediate goods

Goods that will produce a final good

Calculate the size of the labour force (underemployed are always counted in labour force)

Labour force=employed + unemployed

Structural Unemployment

Changes in the structure of the labour force makes some skills obsolete. Workers do not have transferable skills and their jobs will not come back

Four Factors of Production

Land, Labour, Capital, Entrepreneurship

Nominal GDP:

GDP NOT adjusted for inflation

Frictional Unemployment

Workers are temporally unemployed or in-between jobs. Individuals are qualified workers with transferable skills but are not working

Real GDP formula

real gdp=nominal gdp/gdp deflator

E

Enviroment

I

Inequality

Land

Rent

to find Cyclical unemployment

actual-NRU

Final Good

will not be sold again in the form of another good

CPI:

(Price of market basket/price of market basket in base year) *100

GDP Deflator formula

(nominal GDP/Real GDP) *100

Suppose Miguel wants to know the value of real gross domestic product (GDP) for 2011 in terms of the base year 1984 dollars. In 1984 nominal GDP was $10 billion. In 2011 nominal GDP was $15 billion and the price deflator was 200. Real GDP in 1984 dollars would be equal to which of the following?

7.5 billion

Investment by a company that contributes to GDP

A company buys a tractor that will contribute to producing wheat-the tractor will not be resold, even if it is a part of making other goods

Inflation

A general and progressive increase in prices, tracked by the government

Unemployment rate only counts those:

Actively looking for work

Suppose that discouraged workers reenter the labour force and find employment. Will the actual rate of unemployment increase, decrease, or stay the same?

Actual rate of unemployment will decrease

National spending approach equation

C + I+ G+ X-N =GDP

What is true about GDP

Calculations of GDP include the unsold inventories of goods produced within the borders of a country

Factor Income Approach

Employee compensation + rent+ interest+ profit : money received from spending-GDI

NRU

Frictional and Structural enployment

Transfer Payment

Government payments to businesses or households designed to meet a specific objective

SHADOW ECONOMY

Homemade goods do not count into GDP, such as a homemade pie

Does contribute to GDP

If a consumer buys an egg that they will make into an omlet for personal consumption

Goods not included in GDP

If the good isn't bought within a market, than it is not counted within GDP

In order for a citizen of Kona to maintain the same standard of living between 2010 and 2015, what percentage change in nominal income would be needed?

Inflation rate: 390-300/300 *100 =30% Nominal income must rise by the inflation rate in order to maintain the same standard of living.

Capital

Interest

Jan works a 30-hour week for a minimum wage of $10 an hour. Suppose that last year is the base year for the Consumer Price Index (CPI). Which of the following is true about Jan's real wage if at the end of this year the CPI is 125 ?

Jan's real wage is $8 an hour at the end

Number of People (millions) Civilian non-institutional population=250 Employed=135 Unemployed=15 Given the labor market data above, what are the labor-force participation rate (LFPR) and the unemployment rate (UR) ?

LFPR is 60% and UR is 10%

Labour force participation rate

Labour force/ population *100

2 most common ways of calculating GDP

Measure by spending and measure by income

Last year, Myron purchased a $10,000 certificate of deposit with a 3% rate of interest from his bank. The government reported that prices, on average, have fallen by 5% during the current year. Which of the following can be concluded as a result of this transaction?

Myron gains, while bank loses

price indices

index numbers assigned each year that show how much prices have changed relative to the prior year

2 ways to look inflation

inflation rate and price indices

Suppose the consumer price index (CPI) was 100 on January 1st, 2017 and 110 on January 1st, 2018 with no changes in nominal wages. Which of the following is definitely true about the economy between January of 2017 and January of 2018?

inflation rate was 10%

Government buys a tank

is counted in GDP b/c a product is involved

What is a limitation of GDP

it does not account for the distribution of income in a nation or income inequality