Section 3

Key Terms National Accounts Value-Added Approach Real Wage Household Expenditure Approach Real Income Firm Aggregate Spending Inflation Rate Product Markets Income Approach Shoe-leather Costs Factor Markets Value Added Menu Costs Consumer Spending Aggregate Output Unit-of-Account Costs Stock Real GDP Nominal Interest Rate Bond Nominal GDP Real Interest Rate Government Transfers GDP per capita Disinflation Disposable Income Employed Aggregate Price Level Private Savings Unemployed Market Basket Financial Markets Labour Force Price Index Government Borrowing Labour Force Participation Rate Consumer Price Index (CPI) Government Spending Unemployment Rate Producer Price Index Exports Discouraged Workers GDP Deflator Imports Marginally Attached Workers Net Exports Underemployed Inventories Frictional Unemployment Investment Spending Structural Unemployment Final Goods and Services Cyclical Unemployment Intermediate Goods and Services Efficiency Wages Gross Domestic Product Natural Rate of Unemployment

Key Formulas

Gross Domestic Product Expenditure Approach: GDP = C + I + G + (X-M) Income Approach: NI = W + R + i + Pr 3rd Method Value-Added Approach

GDP Calculation Example – All 3 Methods

Not Counted in GDP IF IF U Intermediate goods and services Financial assets and transfer payments Inputs used up in production Foreign-produced goods and services Used goods

GDP Calculations Nominal GDP = Price*Quantity Real GDP = Base Year Prices*Quantity % change in GDP = GDP current year – GDP past year GDP past year

Unemployment Unemployed = no job and actively seeking one in the past 4 weeks Labour Force = unemployed + employed Labour Force participation rate = LF/Population over 16 x 100 Unemployment Rate = # Unemployed Workers/LF x 100

Natural Rate of Unemployment Natural Rate of Unemployment = Frictional Unemployment + Structural Unemployment

Consumer Price Index Price Index in Given Year = Cost of Market Basket in Given Year x 100 Cost of Market Basket in Base Year ****Base Year always has a CPI of 100

Inflation Inflation Rate = Price Level Year 1 – Price Level Year 2 x 100 Price Level Year 1

Key Graphs

Circular Flow Model - Simple

Circular Flow Model - Expanded Government Firms Markets for goods and services Financial Markets Households Factor Markets Rest of the world Government purchases of goods and services Government borrowing Private savings Government transfers Wages, profit, interest, rent Borrowing and stock issues by firms Foreign borrowing and sales of stock Exports Imports GDP Taxes Consumer spending Foreign lending and purchases of stock

AP Exam Tips Be able to draw the circular-flow diagram with two markets. Make sure you know what flows where. Don’t count used goods or inputs in GDP calculations. Use “IF IF U” to remember what to exclude from GDP calculations. Remember that Aggregate Output and Economic Output are other names for GDP. Know the labour force and unemployment rate formulas. Unemployment always rises during recessions and falls during expansions. If GDP falls, unemployment rises, and vice versa. Know the three types of unemployment and how to identify an example of each: frictional, structural, cyclical. Frictional unemployment always exists in an economy. Structural unemployment (almost) always exists in an economy. The natural rate of unemployment is never zero because frictional unemployment always exists. Inflation causes the real value of money to decrease. If inflation occurs your dollar will buy less today than it could by yesterday. Borrowers are helped by higher than expected inflation. Lenders are hurt by higher than expected inflation. Don’t get confused by the term market basket – it is simply a group of goods and services that consumers buy. On the exam it could be 3 or 4 goods given as a simplified example. Know how to calculate CPI and Inflation using a base year.