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