Krugman’s AP Economics Section 3

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Gross Domestic Product
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The total value of the goods and services produced in a nation in a year
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Economic Growth
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An increase in real GDP over some time period
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Product Market
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Where goods and services are exchanged
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Government
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Providers of public goods and services and demanders of both goods and services and the factors of production
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Business Firms
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Suppliers of goods and services and demanders of the factors of production
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Households
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Suppliers of the factors of production and demanders of goods and services
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Factor Market
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Where the factors of production are exchanged
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Inflation (pi)
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Occurs when the economy’s overall price level is rising
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Inflation Rate (pi%)
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The percentage change in the price level from one time period to another
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Consumer Price Index (CPI)
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Measures the change in the prices paid by consumers for a market basket of goods and services
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Bureau of Labor Statistics
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Reports the CPI each month
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Unemployment Rate Formula
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Unemployment/labor force X 100
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Okun’s Law
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Every 1% the increase in the u% causes 2% decline in real GDP
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The Burden of Unemployment
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Not equally shared in society and causes social unrest and is hard on individuals and families
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The Phillips Curve
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A historical inverse relationship between rates of unemployment and corresponding rates of inflation that result in an economy. u%^, pi%v. u%v, pi%^
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Population
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Number of people in a country
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Labor Force
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Number of people in a country that are classified as either employed or unemployed
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Labor Force Participation Rate
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% of population in the labor force
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Employed
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People 16 years and older that have a job, even if it is at least 1 hour every 2 weeks
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Unemployed
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People 16 years and older that don’t have a job but are actively looking for a job in the last two weeks
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Unemployment Rate
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# of unemployed/# of people in labor force
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Not in Labor Force
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Kids, military personnel, retired people, stay at home moms and dads, full time students, your 40 year old uncle who sleeps on the couch all day, most of the homeless
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Full Employment
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Occurs when there is no cyclical unemployment present in the economy
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United States NRU
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4%-5%
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Frictional Unemployment
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People who are temporarily between jobs
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Cyclical Unemployment
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People not working because firms do not need their labor due to lack of demand or downturn in the economy
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Structural Unemployment
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(The worst kind) When jobs don’t exist due to advance in technology
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Nominal GDP
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GDP not adjusted for inflation
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Real GDP
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GDP adjusted for inflation
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Market Basket
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A fixed list of commonly purchases items used to track inflation
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GDP Deflator Formula
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Nominal GDP/ Real GDP X 100
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Producer Price Index
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Measure the cost of a basket of goods and services bought by firms rather than consumers
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Aggregate Supply
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Total amount of goods and services produced and supplied by an economy’s firms over a period of time
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Investment
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Purchase of goods not consumed today but are used in the future to create wealth
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Inflation Rate in year 2
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CPI Year 2-CPI year 1/CPI year 1
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GDP Deflator
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Broad measure of price levels in the economy (the index # shows how prices have changed since the base year)
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GDP Deflator for the base year
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100
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Natural Rate of Unemployment
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The amount of unemployment that would occur when the economy is at full employment
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Recession
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Two consecutive quarters of negative growth

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