Ap Macroeconomics Essay

AP Macroeconomics
Study Guide – Version 1.00 Created by Charles Feng I. Basic Economic Concepts Economic Goals 1. Economic growth – produce more and better goods and services 2. Full employment – suitable jobs for all citizens who are willing and able to work 3. Economic efficiency – achieve the maximum production using available resources 4. Price-level stability – avoid large fluctuations in the price level (inflation + deflation) 5. Economic freedom – businesses, workers, consumers have a high degree of freedom in economic activities 6. Equitable distribution of income – try to minimize gap between rich and poor 7. Economic security – provide for those who are not able to earn sufficient income 8. Balance of trade – try to seek a trade balance
For more information regarding the license, please visit http://creativecommons.org/licenses/by-nc-nd/2.5/ or consult the last page of this guide.

II. Basic Economic Measurements Gross Domestic Product Gross Domestic Product (Expenditures Approach) Expenditures approach: GDP = C + Ig + G + Xn C = personal consumption expenditures (durable consumer goods, nondurable consumer goods, consumer expenditures for services) Ig = gross private domestic investment (all final purchases of capital by businesses, all construction, changes in inventories) G = government purchases (government spending on products and resources) Xn = net exports (exports – imports) Some types of transactions do not involve purchasing of a final good or service, so they should not be counted in GDP. These include public transfer payments (social security, welfare, etc), private transfer payments (monetary gifts, etc), security transactions (stocks and bonds), and secondhand sales (they don’t reflect current production). GDP = Compensation of employees + Rents + Interest + Proprietors’ income + Corporate profits (Corporate income taxes + dividends + undistributed corporate profits) + indirect business taxes + depreciation (consumption of fixed capital) + net foreign factor income The GDP growth rate is calculated with the formula GDPnew − GDPold Growth Rate = ⋅ 100 GDPold If the growth
The excess demand increases the prices of the limited real output, causing prices to rise. Cost-Push (Supply-side) inflation: Per-unit production costs (total input cost ÷ units of output) rise, reducing the amount of companies willing to sell products at the current price level. Then, supply decreases, causing the price level to increase. As price level rises, labor will demand and get higher nominal wages. Businesses will agree, hoping to get back the money by increasing prices. Then, as prices increase even more, labor will find that it has a reason to demand even more wage increases, but that causes more prices increases, and so on. If we divide 70 by the annual rate of inflation, this quotient is the number of years it takes for inflation to double the price level. We can fight inflation by trying to reduce demand or by trying to prevent a wage-price spiral from getting out of hand. We can use either fiscal or monetary policy (means of doing so is explained later). Fiscal action will result in a budget surplus. A Nominal value is an unadjusted value. A Real value is a nominal value adjusted for