1. Section 3

2. 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

3. Key Formulas

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

5. GDP Calculation Example – All 3 Methods

6. 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

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

8. 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

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

10. 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

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

12. Key Graphs

13. Circular Flow Model - Simple

14. 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

15. 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.