AP®︎ Macroeconomics: Unit 2 Flashcards
Master key terms and definitions for Unit 2 of AP Macroeconomics – Economic Indicators and the Business Cycle to help you prep for quizzes and the AP exam.
Circular Flow Diagram
A model showing how money, resources, goods, and services move between households and firms.
A model showing how money, resources, goods, and services move between households and firms.
Product market: goods and services are sold; factor market: resources like labor, land, and capital are sold.
Households supply resources and buy output; firms demand resources and produce and sell output.
The dollar value of all final goods and services produced within a country's borders in one year.
Products bought for end use rather than for resale or further production.
Products used to make other goods and excluded from GDP to avoid double counting.
Expenditures approach sums spending, income approach sums income, value-added approach sums each stage's added value.
A method that adds consumption, investment, government purchases, and net exports to find total output.
Household spending on final goods and services, except new housing.
Business spending on capital goods, inventories, and new residential construction.
Government purchases of final goods and services, excluding transfer payments.
Exports minus imports, showing the value of domestically produced goods sold abroad minus foreign goods bought domestically.
A method that adds wages, rent, interest, and profit earned from current production.
A method that adds the increase in value created at each production stage.
Mistakenly counting the same output more than once, usually by including intermediate and final goods together.
Government payments without current production in return, so they are excluded from GDP.
Underground market transactions excluded because they are not officially recorded in national accounts.
The wear and tear on capital goods over time, which is not counted as new output.
The value of current final output found using current-year prices and quantities.
Ways gross domestic product fails to fully measure economic well-being or standard of living.
Population, inequality, environment, and shadow economy are four major reasons GDP can mislead.
A country's total output divided by population, used to compare average living standards.
A broader well-being measure combining income with health and education indicators.
Uneven income distribution can make average output per person hide major differences in living standards.
Pollution and resource damage from production may raise output while reducing overall well-being.
Unreported economic activity, legal or illegal, that is omitted from official output statistics.
Illegal buying and selling of goods and services that is excluded from official GDP data.
Production or labor not bought and sold in markets, such as household work, volunteering, or caregiving, so it is excluded from GDP because no market transaction occurs.
People age 16 and over who are employed or actively seeking work.
The percentage of the labor force that is unemployed and actively looking for work.
The percentage of the adult population that is in the labor force.
Unemployment rate = unemployed ÷ labor force × 100; participation rate = labor force ÷ adult population × 100.
People who want jobs but stopped looking, so they are not counted in the labor force.
It can understate joblessness by excluding discouraged workers and some involuntary part-time workers.
Frictional: between jobs; structural: skills mismatch; cyclical: recession-caused decline in labor demand.
Cyclical unemployment equals actual unemployment minus the natural rate during recessions or booms.
It can change over time because labor force characteristics and job-matching conditions change.
The jobless rate at full employment, when only frictional and structural unemployment exist.
A measure showing how the overall price level changes over time relative to a base year.
An index measuring the cost of a fixed basket of consumer goods and services over time.
A fixed sample of goods and services used to track consumer price changes over time.
The reference year for an index, assigned a value of 100.
Cost of market basket in current year divided by cost in base year, times 100.
A sustained increase in the general price level of goods and services in an economy.
A sustained decrease in the general price level of goods and services in an economy.
A decrease in the inflation rate, meaning prices rise more slowly than before.
The percentage change in a price index from one period to the next.
New index minus old index, divided by old index, times 100.
Convert a current-dollar value to a real value by adjusting with a price index.
Income adjusted for inflation, showing purchasing power rather than dollars received.
An upward bias in CPI caused when consumers switch to cheaper alternatives but the basket stays fixed.
It estimates how much income consumers need to maintain the same standard of living over time.
Nominal values use current prices, while real values are adjusted for inflation.
A real value equals a nominal value divided by a price index, times 100.
Costs to firms of changing posted prices, catalogs, menus, and related materials.
Time and effort spent reducing cash holdings and making more frequent financial transactions.
A decline in what money or fixed nominal income can buy as prices rise.
A transfer of real income or wealth between groups when actual inflation differs from expected inflation.
Higher-than-expected inflation helps borrowers and hurts lenders by lowering debt's real repayment value.
Lower-than-expected prices raise debt's real burden, helping lenders and hurting borrowers.
Multiply each final good's current-year quantity by its current-year price, then add.
A price index equal to nominal GDP divided by real GDP, times 100.
It equals 100 because nominal GDP and real GDP are the same.
It can rise from higher prices alone, even if actual production does not increase.
Measures output using current prices versus base-year prices to separate prices from production.
The reference year whose prices are held constant to calculate inflation-adjusted output.
Finds inflation-adjusted output using base-year prices or by deflating nominal GDP with the GDP deflator.
Short-run fluctuations in real output and employment around the economy's long-run growth trend.
Expansion is rising real GDP and employment; recession is declining real GDP and employment.
Peak is the highest point before decline; trough is the lowest point before recovery.
The difference between actual real GDP and potential real GDP.
The real GDP level produced when unemployment equals the natural rate.
Inflationary gap means actual output exceeds potential; recessionary gap means actual output is below potential.
