Unit II AP Test Review Concepts

Unit II Review
• Macroeconomics is the study of the economy as a whole; microeconomics is the study of individual parts of the economy such as businesses, households, and prices.  Macroeconomics looks at the forest, microeconomics at the trees.

• A circular-flow diagram illustrates the major flows of goods and services, resources, and money in an economy.  It shows how changes in those flows can alter the level of goods and services, employment, and income.

• Gross Domestic Product (GDP) is the market value of all final goods and services produced in a nation in one year; it is the most important measurement of production and output.

• GDP counts only final goods and services; it does not count intermediate goods and services.

• GDP also does not count second hand goods; the buying and selling of stocks and bonds; and transfer payments such as social security benefits, unemployment compensation, and certain interest payments.

• GDP includes profits earned by foreign-owned businesses and income earned by foreigners in the United States, but it excluded profits earned by U.S.-owned companies overseas and income earned by U.S. citizens working abroad.

• GDP is most easily calculated in two ways; (1) add all the consumption, investment, and government expenditures plus net exports; and (2) add all the incomes received by owners of productive resources in the economy.

• Gross National Product (GNP) includes profits earned by U.S.-owned companies overseas and income earned y U.S. citizens working abroad, but it does not include profits earned by foreign-owned companies in the United States or income earned by foreigners working in this country.

• Other measures derived from national income accounting measures include Net National Product (NNP), National Income (NI), Personal Income (PI), and Disposable Personal Income (DPI).

• In 1991, the basic measurement of output and production in the United States was changed from GNP to GDP.  Most other nations already used GDP, and this change reflected the increasing interdependence of the world’s economies.

• Price indexes are used to measure price changes in the economy; they are used to compare the prices of a given “bundle” or “market basket” of goods and services in one year with the prices of the same “bundle” or “market basket” in another year.

• A price index has a base year, and the price level in that year is given an index number of 100; the price level in all other years is expressed as a percentage of the price level in the base year.

• Price index number = Current year prices/Base year prices x 100.

• The most frequently used price indexes are the GDP Price Deflator, the Consumer Price Index (CPI), and the Producer Price Index (PPI).

• Real GDP is adjusted for price changes; nominal GDP is not adjusted for price changes.

• Inflation is a general increase in the overall price level.

• Savers, lenders, and people on fixed incomes generally are hurt by unanticipated inflation; borrowers gain from unanticipated inflation.

• Unemployment occurs when people who are willing and able to work cannot find jobs at satisfactory wage rates.

• Unemployment is classified into four categories: frictional, cyclical, structural, and seasonal.

• The unemployment rate represents the percentage of the labor force that cannot find work on acceptable terms.

• Full employment is not defined to mean zero unemployment.  Frictional and structural unemployment exist even with zero cyclical unemployment.

• A business cycle measures the ups and downs of economic activity over a period of years.

• The phases of the business cycle are expansion, the peak, contraction, and trough