AP Macro - Unit 2 - Economic Indicators and the Business Cycle
Circular Flow Model
A diagram that traces the flow of resources, products, income, and revenue among economic decision makers. All spending must equal all income.
Deflation
A general decrease in prices. The purchasing power of a currency increases.
Inflation
A general rise in prices. The purchasing power of a currency decreases.
Subsidy
A government payment that supports a business or market.
Resource (Factor) Market
A market in which households sell and firms buy resources or the services of resources.
Gross Domestic Product (GDP)
A measurement of the total goods and services produced within a country. Its a measure of final output of the economy
Income Approach
A method of computing GDP that measures the income-wages, rents, interest, and profits-received by all factors of production in producing final goods and services. Wages + Rent + Interest + Profits
Expenditure Approach
A method of computing GDP that measures the total amount spent on all final goods and services during a given period. C + I + G + (X-M)
Disinflation
A reduction in the rate of inflation from year to year.
Consumer Price Index (CPI)
An index of the cost of all goods and services to a typical consumer. Basket Price in any Year/Basket Price in the Base Year x 100
Inflationary/Positive Output Gap - Business Cycle
Any point where actual output is above the potential/full employment output. Only structural and frictional unemployment.
Recessionary/Negative Output Gap - Business Cycle
Any point where actual output is under the potential/full employment output. All three types of unemployment.
Structural Unemployment
Changes in the labor force that make some skills obsolete. Non-transferable worker skills. Caused often by technology.
Nominal GDP Formula
Deflator x Real GDP/100
The Business Cycle
Fluctuations in economic activity, such as employment and production.
GDP per Capita
GDP divided by population.
Real GDP (in terms of price)
GDP measured in constant prices.
Nominal GDP (in terms of price)
GDP measured in current prices.
Purchasing Power
How much of a good or service your money can buy.
Discouraged Workers
Individuals who would like to work, but have given up looking for a job.
Costs of Unexpected Inflation (Lenders vs. Borrowers)
Lenders are hurt. The currency they are getting paid back has less purchasing power. Borrowers benefit. The currency they are paying back has less purchasing power.
Natural Unemployment Rate (NRU)
NRU = Frictional + Structural Unemployment Cyclical unemployment is not included in the NRU.
Rate of Change
New - Old/Old x 100
Real GDP Formula
Nominal GDP/GDP Deflator x 100
GDP Deflator
Nominal GDP/Real GDP x 100
Transfer Payments
Payments by the government to households for which the government does not receive a new good or service in return. Unemployment payments, social security, welfare, etc.
Frictional Unemployment
Temporary unemployment or being between jobs. Quitting, getting fired, graduating from school.
Actual GDP/Output
The current level of output on the business cycle. (the line that curves up and down)
Potential GDP/Output
The level of output that can be produced when there is "full employment" (NRU). Also represents the LRAS.
Product Market
The market in which households purchase the goods and services that firms produce.
Unemployment Rate
The percentage of the labor force that is unemployed. # of People Unemployed/# of People in the Labor Force
Labor Force Participation Rate
The percentage of the working-age population in the labor force. Labor Force/Population x 100
Labor Force
The total number of workers, including both the employed and the unemployed.
Cyclical Unemployment
Unemployment caused by a recession (economic downturn).
Underground Economy
Unreported legal and illegal activities that do not show up in GDP statistics.
