AP Macro Module 2

  1. Circular Flow
    • 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
  2. Factor Market
    • Def- reasource market where households sell resources and businesses buy them
    • Notes
    • -buying and selling of finished goods, like a morning latte
  3. Resource Market
    • 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
  4. Finacial Market
    Def- the banking, stock and bond markets through which private saving and foreign lending flow to become investment, govt, and foreign borrowing
  5. Gross Domestic Product (GDP)
    • 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
  6. Items not included in GDP
    • -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
  7. Investment Spending (Ig)
    • 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
  8. 3 types of GDP
    • -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
  9. Used to determine a change in the 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
  10. 3 types of income
    • -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
  11. Gross National Product (GNP)
    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
  12. Business Cycle
    • 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
  13. Inflation
    • 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
  14. 4 types of inflation
    • -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
  15. Types of Indices to measure inflation
    • -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
  16. Basket of Goods
    • -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
  17. Formula to determine increase in inflation
    • CPI of later year - CPI of earlier year
    • ______________________________ X 100
    • CPI of earlier year
  18. Real Income Formula
    • Nominal income
    • CPI/100
  19. To find a new CPI
    • CPI of later year
    • _______________ X 100
    • CPI of earleir year
  20. Cost of Living Adjustment (COLA)
    • -from govt or employer
    • -based on CPI, to try to keep up with inflation
  21. Rule of 70
    • -to find how long it will ake for the price of a good to double (in years)
    • -70/interest rate
  22. Unemployment
    • -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
  23. 4 types of Unemployment
    • -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
  24. Natural Rate of Employment
    • 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
Card Set
AP Macro Module 2
Key Terms and Notes