AP Macro Module 2

• Def- shows the connection between markets government, firms, and households in an economy
• Notes
• -4 main players: govt., households, business firms and the rest of the world
• -3 main markets: product, factor, and financial

• Def- reasource market where households sell resources and businesses buy them
• Notes
• -buying and selling of finished goods, like a morning latte

• Def- factor market where households sell resources and businmesses buy them
• Notes
• -exchange of necessary resources used to produce finished good, like a coffee bean grinder

Def- the banking, stock and bond markets through which private saving and foreign lending flow to become investment, govt, and foreign borrowing

• Def- the total dollar value of all final goods and services produced in a nation during one year
• Notes
• -4 categories in GDP: conseumer spending (C), investment spending (Ig), govt spending (G), and net exports (X-M)
• -aggregate income=GDP=C+Ig+G+(X-M)
• -calculated in 2 ways:expenditure or income approach
• -expenditure: C+Ig+G+(X-M)
• -income: wages+profits+interest+rent+deprecietion+indirect business taxes-subsidies+net income of foreigners

• -purely financial: stock purchases, public transfer payments(welfare, unemployment comp, social security, student aid), private transfer payments(cash gifts), financial gains from sale of asset(sell house for more money)
• -intermediate goods: used in production, so included in cost of final good
• -secondhand sales: used goods
• -nonmarket/household production activities: fix own car, stay-at-home-mom
• -leisure activities
• -underground economy: unreported cash to laborers(tips) and criminal activity
• -costs of pollution

• Def- spending to increase productivity or output; market value of unsold goods or iventories
• -difference between inventory value and selling price is added/subtracted to GDP
• -if firm produces more goods than sell, GDP increases
• -if firms sell more goods than produce, invntories and GDP decreases
• -all final purchases of machinery, equipment, and contruction
• -no money/financial investment: stock, bonds money securities
• -if degree of capacity(how much existing factory space is available) increase, Ig decreases. if degree of capacity decrease, Ig increases

• -nominal GDP: not adjusted for inflation; reflects final value of all goods and services produced in current year prices
• -real GDP: adjusted for inflation; allows economists to compare health of economy over time; normally used in Macro
• -real GDP per capita: real GDP/# of people in the nation; compares wealth and standard of living

• -rate of inflation
• -rate of population growth
• -change in distribution of income
• -change in leisure time of typical worker
• -change in impact of externalities not in GDP calculation
• -change in product quality

• -national income: sum of all income when a household sells all resources
• -personal income: money households earn before taxes
• -disposable income: money households have to spend after taxes

Def- the final value of all goods and services produced by a nation's citizens(no matter where they live) during some time period, usually a year

• Def- portrays the highs and lows of the economy as people buy and sell gods and services
• Notes
• -secular growth trend: no set time; overtime everything evens to an average growth rate of 2.5-3.5%
• -random fluctuations: small changes in an irregular pattern
• -Expansion: happy medium; healthy 3-5% inflation, consumer spending, low unemployment, real GDP increases
• -Peak: economy has reached max growth; as prices become to high, consumers save not buy; too many inventories=business slows production and lays off workers
• -Contraction: real GDP decreases, unplanned inventories grow, more lay offs=no job or income
• -Trough: bottom of cycle

• Def- a sustained increase in the price level over time
• -inflaionary GDP gap: when actual GDP > potential GDP
• -stagflation: when an economy is suffering high inflation and unemployment(over 5%) due to a decrease in supply; prices rise and employers lay off workersdue to decrease in QD
• -inflation doesn't hurt businesses/people spending money today because they can buy more now then their money is worth in the future
• -unexpected inflation hurts lenders because they don't get full value of original loan
• -hyper inflation: aka galloping inflation; when prices and wages double(or more) in a year to grow to double digits

• -cost push: when prices rise due to the cost of making the product increases (supply decreases and shifts left)
• -wage push: when prices rise due to the fact that workers recieve more wages for the same amount of work
• -demand pull: when prices rise due to an increase in consumer demand for goods (higher equilibrium price)
• -profit push: when the owners of a business raise prices simply because they wish to make a profit

• -consumer price index(CPI): measure change in prices of goods and services consumers buy; compares cost of standard basket from year to year
• -producer price index(PPI): measures changein prices of producing goods from year to year; called leading indicator; oil prices are VIP to PPI
• -GDP deflator: change in average price level for all goods and servicesproduced w/o imports; changes in consumer spending and the intro of new goods and services is reflected; real GDP=(nominal GDP/GDP defaltor) X 100

• -explains how the changing prices of goods play out in the final inflation figure(CPI); some goods have a larger weight on overall price than others
• -to calculate value of basket goods: 1 year chosen for baseline, the set to 100. when new baseyear is set, all others must be adjusted using inflation formula. if above 100, inflation has increased
• -can become stale; doesn't reflect changes in buying habits, changes in inovation or improvements in quality

• CPI of later year - CPI of earlier year
• ______________________________ X 100
• CPI of earlier year

• Nominal income
• CPI/100

• CPI of later year
• _______________ X 100
• CPI of earleir year

• -from govt or employer
• -based on CPI, to try to keep up with inflation

• -to find how long it will ake for the price of a good to double (in years)
• -70/interest rate

• -rises in contraction phase; economy operating inside of PPC
• -labor force: all people over 16 who are currently working or actively searching for a job
• -unemployment rate=# of unemployed people/# of people in labor force

• -Frictional: caused by people voluntarily moving from one job to another, duration is shor, some people just starting in the business world as well
• -Seasonal: when peopel find work that is only available at certain times of the year (lifegaurd etc.) voluntary
• -Structural: loss of industry jobs caused by technological replacements, international trade and competion, outsourcing/relocation, changing tastes or values, changing min wage/union wage and/or benefit increases, or govt policy; lasts long because workers must develop new skills or relocate involuntarily
• -Cyclical: caused by a decrease in total spending in economy; businesses don't need as many workers involuntary

• Def-frictional unemployment plus structural unemployment
• -3-5% in US; greater than 5% is a recession
• -full labor force does NOT equal 100%
• -GDP gap=unemployment > natural rate of unemployment
• -Okun's law: for every 1% of unemployment over natural rate, a 2% GDP gap occurs