AP Review - Economic Indicators + Business Cycle

Question 1

Private Sector

Answer 1

Part of the economy not connected to the government

Question 2

Public Sector

Answer 2

Part of economy controlled by the government

Question 3

Factor Payments

Answer 3

Payment for factors of production (rent, wages, interest, profit, etc.)

Question 4

Transfer Payments

Answer 4

Government redistributes income (benefits and programs; not included in GDP)

Question 5

GDP (Growth Domestic Product)

Answer 5

Dollar value of all final goods and services produced in a country in a year

Question 6

GDP per capita

Answer 6

Total GDP divided by the population

Question 7

Stuff that is not included in GDP calculation

Answer 7

1. Intermediate goods (NOT final product)
2. Financial transactions (stocks, bonds, real estate)/used goods
3. Nonmarket/illegal activities (drugs and stuff)

Question 8

Why do some countries have much higher GDP than others?

Answer 8

1. Economic system (ex. Capitalism&raquo_space; Communism)
2. Rule of law (no corruption)
3. Capital stock (more capital == higher levels of productivity)
4. Natural resources (countries with more natural resources are more productive)

Question 9

Expenditures approach to calculating GDP

Answer 9

Literally just add up all spending (cigarettes and xanax)
Consumer Spending + Business Investment + Government Spending + (Imports - Exports)

Question 10

Income approach to calculating GDP

Answer 10

Add up all income (labor, rent, interest, profit)

Question 11

Value-added approach to calculating GDP

Answer 11

Add up the dollar value that is added to products at each stage of production

Question 12

3 components of consumer spending

Answer 12

1. Durable goods (washing machines, cars, etc.)
2. Non-Durable goods (clothes, food, toilet paper, etc.)
3. Services (dental work, repairs, tutoring)

Question 13

Investment

Answer 13

When businesses buy capital; NEVER assets (stocks, bonds, real estate)

Question 14

Inventories

Answer 14

Goods produced and stored in anticipation of later sales (counts towards GDP of the year it was made)

Question 15

Inflation Rate

Answer 15

Percent change in prices from year to year

Question 16

Price Indices

Answer 16

Index #’s given to each year to show how prices have changed relative to a base year (base year always index 100)

Question 17

Market Basket

Answer 17

Fixed selection of goods and services that represents a household over a year (to get the cost, add up the prices of all items in the basket for a given year)

Question 18

Consumer Price Index (CPI)

Answer 18

(price of market basket) / (price of market basket in the base year) * 100

Question 19

Inflation Rate Equation

Answer 19

(CPInew - CPIold) / (CPIold) * 100%

Question 20

Problems with CPI

Answer 20

1. Substitution bias (increase in price of one good means buy substitutes of that good)
2. New products (CPI market basket may not include new products)
3. Product Quality (CPI ignore increase/decrease in product quality)