AP EXAM REVIEW UNIT 2 MEASURE OF ECONOMIC PERFORMANCE

Formula Cards

GDP GDP = C + Ig + G + Xn Consumption Gross Business Investment Government Spending Net Exports Exports – Imports X-M

Price Index Price Index = _Price of goods in a specific year_ Price of same goods in a base year X 100

Nominal GDP Nominal GDP = Units of output x price

GDP Deflator GDP Deflator = Nominal GDP Real GDP X 100

Real GDP Real GDP = Nominal GDP__ price index (in hundredths)

Real GDP Real Price of good in quantity of good sold GDP base year in given year = X

Rate of Inflation Rate of Inflation = Year later CPI – Year earlier CPI year earlier CPI X 100

Unemployment Rate unemployed labor force = Unemployment Rate X 100

change Year 2 – Year 1 Year 1 = Percent change X 100

I.Circular Flow Diagram A.Resource Market and Factor Market 1.Households own factors of production – sell them to Firms 2.Firms buy factors of production – pay wages, rent etc. B.Product Market 1.Firms sell goods and services to households 2.Households pay for goods and services

The expenditures approach - C + Ig + G + Xn = GDP 1.C = Personal Consumption a.Purchases of finished goods and services b.NOT houses or other construction 2.Ig = Gross Private Business Investment a. Factory equipment maintenance b.New factory equipment c.New Construction (houses or factory) d.Unsold inventory of products build in a year, but not sold in that year 3.G = Government Spending 4.Xn = Net foreign factor of Trade: Exports minus Imports a.Exports = dollars in b.Imports = dollars out c.Since WWII, Xn has usually been a negative number C + Ig + G + Xn = GDP Formula youtube.com /watch?v=SYF Yla1H7KE GD P

What doesn’t count in GDP 1.Second hand goods 2.Gifts or transfers (social security welfare etc.) 3.Stock market transactions 4.Unreported business activities 5.Illegal activities 6.Financial transactions between banks and businesses 7.Non market activities like volunteer work

Does it Count?

The bicycle you got at the neighbor’s garage sale.

The designer shoes you found half price at Nordstrom

Your new back to school lunchbox

Grandma’s Social Security Check

The value of the time you spend volunteering at the local animal shelter

The $20 cash you earned babysitting.

The $20 you paid for a pedicure.

The $20 you paid to a “street pharmacist”

The $20 worth of girl scout cookies you bought

GDP PRACTICE QUESTION

GDP in an economy is $3452 billion. Consumer expenditures are $2343 billion, government purchases are $865 billion and gross investment is $379 billion. What are Net exports?

Formula to use -- C + Ig + G + Xn = GDP $ $379 + $865 + Xn = $3452 $ Xn = $3452 Xn = -135

Business Cycle – alternating rises and declines in economic activity A. Peak – business activity has reached a temporary maximum B. Recession – decline in total output, income, employment, and trade C. Trough – output and employment are at their lowest levels D. Recovery – output and employment rise toward full employment

Inflation – rise in general price level A.Measuring inflation 1.CPI – consumer Price Index a.One measure of inflation b.Measures the cost of a consistent market basket of goods 2.When using Price indexes – the Index year is always 100 Rate of inflation = Year later CPI - year earlier CPI Year earlier CPI X 100

Disinflation – lowering of the inflation rate Deflation – lowering of price level Hyperinflation – extremely rapid inflation

Who isn’t in the labor force 1. under in the military 3. institutionalized 4. retired 5. homemakers 6. students 7. discouraged workers Who does count as part of the labor force 1. full time workers 2. part time workers (even if they would rather be working full time 3. unpaid family workers 4. those on sick leave, vacation, or strike 5. looking for work

Types of Unemployment Frictional unemployment – those between jobs Structural unemployment 1.Caused by changes in consumer demand 2.Change in technology 3.Geographical changes Cyclical unemployment – in the recession stage of the business cycle What does the rate mean 1. 0% - 3% - overextended economy 2. 4 – 5% - full employment 3. 6% + - weak or recession economy 4. 25% - highest unemployment 1933

What Type of Unemployment is it? Frictional Cyclical Structural Not unemployed

A computer programmer is laid off because of a recession. Cyclical

An unemployed college graduate is looking for his first job. Frictional

A college graduate works at a job that does not require a college education. Not unemployed

Advances in technology make the assembly-line worker’s job obsolete. Structural