AP Economics Notes Chapters 6, 8 (Boyes and Melvin)
GDP is ______
GDP is the #1 indicator of how the economy is ______.
GDP ______provides a better measure of individual well-being than GDP.
The standard of living of a country is determined by ______/ ______.
Two ways to Calculate GDP:
1)
2)
What is excluded from GDP?
Nominal vs. Real GDP
Nominal: Current GDP measured at ______market prices.
Nominal GDP may overstate the value of production because of the effects of ______.
Real: Real GDP is ______GDP measured with a ______
Dollar. Real GDP holds the value of the dollar ______and is useful for making year to year comparisons.
GDP Example:
Gross National Product:
GNP is the total value of final goods and services produced during a given period by the ______of a country no matter where they live. The goods and services are produced by the “nationals” of the country.
GNP = ______+ receipts of factor ______from the rest of the world – payments of factor ______to the rest of the world.
•Potential Real GDP
The level of output produced when non-labor resources are fully utilized and unemployment is at its natural rate.
•GDP gap = potential real GDP – actual GDP
Inflation is:
An ______in the economy’s price level.
A ______in money’s purchasing power.
When the ______of money is growing faster than the ______of goods and services
Causes of Inflation:
•______: increases in aggregate demand outpace increases in aggregate supply.
•______: increases in production costs cause firms to raise prices.
•Hyperinflation: extremely high rate of inflation.
How is inflation measured?
•Consumer Price Index:
Inflation rate this year = 100 x (CPI ______year – CPI ______year / CPI ______year.
Calculating CPI example:
Measuring Inflation:
•GDP deflator: If nominal GDP were to increase 5% but real GDP does not change, the GDP deflator indicates aggregate prices went ______5%.
GDP Deflator =
Examples:
1) If Nominal GDP is $100B and Real GDP is $80B, what is the Deflator?
2) If Real GDP is $200B and the Deflator is 120, what is the Nominal GDP?
3) If Nominal GDP is $300B and the Deflator is 150, what is the Real GDP?
Nominal vs. Real Interest:
•Nominal Interest Rate (i): the ______interest rate in the market and includes the effect of inflation.
•Real Interest Rate (r): nominal rate adjusted for ______(p).
•r = i - p
Inflation Example:
Two ways Inflation is Reported:
CPI Headline inflation –
CPI Core Inflation -
Who does inflation affect?
Who wins with Inflation:
1)
2)
3)
Who loses with Inflation:
1)
2)
3)
•Business Cycle: the pattern of ______rising and falling.
•Expansion: recovery from a recession
•Recession (Contraction): two or more successive quarters (6 months) of falling real GDP.
•Depression: a severe, prolonged economic contraction. Usually involves unemployment rising to greater than 10% for years.
Peak:
Recession:
Trough:
Recovery:
The unemployment rate is the percentage of the ______that is not working.
The U.S. Labor Department defines the labor force as being equal to:
• All U.S. residents
• Over the age of 16
• Who are not institutionalized
• Who are looking for work
Not included in the labor force
•Discouraged Workers are workers who have looked for work in the past year, but who have stopped looking because they believe no one will offer them a job.
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•Underemployment is the employment of workers in jobs that do not utilize their productive skills.
Frictional Unemployment
Usually short term, occurs because workers and employers have to find one another.
College graduates seeking employment are a good example of frictional unemployment.
Structural Unemployment
Reflects an imperfect match-up of employee skills and the skill requirements of the available jobs or a permanent reduction in demand for an industry’s output.
Advancements in technology have resulted in consistent declines in employment in the agriculture, forestry and fishing industries.
Cyclical Unemployment
A product of business cycle fluctuations.
As a recession occurs, cyclical unemployment increases, and as growth occurs, cyclical unemployment decreases.
As the housing boom of the early 21st century slows, unemployment in related industries like builders and real estate agents increases.
Seasonal Unemployment:
A product of regular, recurring changes in the hiring needs of certain industries on a monthly or seasonal basis.
For example, retail sales are higher during the holiday season therefore unemployment in this industry goes down during the months of November and December.
•Natural Rate of Unemployment
The level of unemployment that results when the rate of unemployment is normal, considering both frictional and structural factors. Also called the NAIRU (Nonaccelerating Inflation Rate of Unemployment)