AP Macroeconomics Unit 2: Economic Indicators and the Business Cycle | Notes and practice

Notes

Gross domestic product (GDP): the market value of all final goods and services produced within a country in a year.
Expenditure approach: $GDP = C + I + G + X_n$ (consumption, investment, government purchases, net exports).
Not counted: intermediate goods, used goods, financial transactions (stocks), transfer payments (Social Security), and non-market activity.
Nominal GDP uses current prices; real GDP adjusts for inflation. Real GDP $\displaystyle = \frac{\text{nominal GDP}}{\text{GDP deflator}} \times 100$.

Unemployment rate $\displaystyle = \frac{\text{unemployed}}{\text{labor force}} \times 100$. The labor force counts people working or actively looking for work; discouraged workers aren't counted.
Types: frictional (between jobs), structural (skills don't match jobs), and cyclical (from recessions).
The natural rate of unemployment = frictional + structural. At full employment, cyclical unemployment is zero.

Consumer Price Index (CPI) $\displaystyle = \frac{\text{cost of market basket this year}}{\text{cost in base year}} \times 100$. Inflation rate $\displaystyle = \frac{\text{new CPI} - \text{old CPI}}{\text{old CPI}} \times 100$.
Unexpected inflation hurts lenders and people on fixed incomes and helps borrowers.
Real interest rate ≈ nominal interest rate − inflation rate.
Demand-pull inflation comes from rising spending; cost-push inflation from rising production costs (like oil price shocks).

Expansion → peak → contraction (recession) → trough. A recession has falling real GDP and rising unemployment.

Which is counted in GDP?

GDP = C + I + G + Xn. What does $X_n$ stand for?

A worker who loses a factory job because a robot replaced it is:

A country has 150 million employed and 10 million unemployed. What is the unemployment rate?

The CPI rises from 200 to 210. What is the inflation rate?

Unexpected inflation tends to help:

The nominal interest rate is 7% and inflation is 3%. The real interest rate is about:

Cyclical unemployment rises during:

Write your answer first, then open the scoring guide.

Free-response question

In a country last year, nominal GDP was 12 trillion dollars and the GDP deflator was 120.

(a) Calculate real GDP.

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Real GDP $\displaystyle = \frac{12}{120} \times 100 = 10$ trillion dollars.

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(b) Explain why economists use real GDP instead of nominal GDP to measure growth.

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Real GDP removes the effect of price changes, so it shows whether the economy is actually producing more goods and services.

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(c) Unemployment rises from 4% to 8% as real GDP falls. Identify the type of unemployment that increased and the phase of the business cycle.

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Cyclical unemployment increased, during a contraction (recession).

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