hi everybody jacob reed here from reviewecon.com today we're going to be looking at unit 2 for macroeconomics this one is all about economic indicators these videos go alongside the total review booklet from reviewecon.com if you want to pick yourself up a copy head down to the links below also don't forget to like and subscribe let's get into the content [Applause] the first thing we're going to do is look at the circular flow model of a free market economy we have two economic actors we have households and businesses we also have two markets within this circular flow model the first one is the product market in the product market businesses are providing households with goods and services households are providing money to those businesses in the form of sales we also have another market that's called the factor market in the factor market resources land labor capital and entrepreneurship are going from the households to the businesses and businesses are providing those households with wages interest rent and profit of course in the united states we do not have a purely free market economy we have a mixed economy called capitalism or free enterprise we have the government as a third economic actor they get goods and services from the product market and they get resources from the factor market they also provide public goods to households and businesses and pay for them through taxes gross domestic product is a way of calculating the economic activity within this circular flow diagram we have couple of different methods one of those deals with calculating in the factor market and the other two deals with calculating gdp in the product market let's look at those more closely now here's our definition of gdp it is the total value of all final goods and services produced within a country in a calendar year there are three methods for calculating gdp that you need to know the first one is called the value-added approach here we are looking at the contributions of a country's firms towards making a final good for example a united states firm may import eight dollars of fabric from another country then they take that eight dollars of fabric and turn it into a fifteen dollar shirt that's seven dollars of added value then a t-shirt screener adds some graphics and then sells that shirt for twenty dollars that gives us a total of twelve dollars of added value for the united states gdp another way of calculating gdp focuses on the factor market it's called the income approach here we are looking at the money that goes from businesses to households in the factor market that's rents wages interest and profit with some minor adjustments like taxes and depreciation the method for calculating gdp that shows up most on the ap macroeconomics exam is the output expenditure model for calculating gdp here we are looking at the sales that are in the product market this is the money that goes from households to businesses the formula for the output expenditure model of gdp is c plus i sub g plus g plus x sub n let's look at each of those variables a little closer the first variable is c for consumption that's the consumer purchases of goods and services it could be the purchase of your lunch the service of getting your car washed or buying that t-shirt we just looked at the next variable is gross investment here we are looking at primarily business purchases of physical capital but we also look at changes in inventory so if the business purchases some new capital equipment that gets added to gdp we also look at for example a shoe factory that produces more shoes than it sells that change in inventory will actually be added to gdp as gross investment a little side note unexpected increases in inventories can be an indication of economic downturn up ahead the next variable is g that stands for government purchases these are expenditures by the government where the government receives goods or services for their money it can be the purchase of a brand new tank for the military or the services of a high school economics teacher the last variable is net exports here we have exports minus imports those are the things that foreign countries buy from us and subtract the things that we buy from them make sure you keep this formula in mind as you move throughout this class it shows up on exams over and over and over even in future units now when it comes to gdp we're attempting to calculate the total amount of wealth produced within a country for a particular year that leads us to some items that are specifically not counted in gdp first up we have used items used items were already counted in a previous year as a result when those items are resold we don't count those transactions in the output expenditure model for gdp intermediate goods such as lumber purchased by a contractor will not be counted in gdp because the final house or whatever is being built will be counted it's that final production is what we look at not those intermediate goods the last thing we're not going to count are financial transactions such as the purchases of stock or transfer payments in those transactions goods and services are not being produced money is being shuffled around so we don't count those transactions in gross domestic product per capita gdp which is gdp divided by the population of a country is often used by economists to determine a country's standard of living it has some inaccuracies though that you need to be aware of first of all we have the underground economy there's a whole portion of the economy where transactions are happening but nobody's keeping track in the underground economy things like drug sales and illegal gambling rings those transactions are not counted because nobody is reporting those sales to the government the next inaccuracy we have is home production sometimes called non-market activities if you cook your own food we don't count that in gdp it only gets counted in gdp if you go to a restaurant and purchase food that somebody else prepared the next one is bads counted as goods sometimes pollution or natural disasters occur and the cleanup efforts are counted as a positive in gdp making it appear as though those disasters were better for the economy the final limitation about gross domestic product when being used as a measure for standard of living is the distribution of income gdp only tells us the total well-being it doesn't tell us who is getting that well-being so we might want to look at the lorenz curve or the genie coefficient that you may have learned back in micro the next thing we're going to do is look at unemployment what does it mean to be unemployed in order to be unemployed you must be not working and actively looking for work the unemployment rate is the number of people that are unemployed divided by the labor force times 100. the labor force that we're dividing by is the unemployed people looking for work and not working plus the employed people the labor force participation rate is the percentage of citizens that are part of the labor force to find that take the labor force divide it by the civilian population and times that by a hundred keep these formulas in mind for your next test the unemployment rate has some problems when it is used as the sole indicator of what's going on in a country's labor market the first reason is discouraged workers those are workers that don't have a job and aren't actively looking for a job since they aren't looking for work they are not part of the labor force if unemployed workers become discouraged workers the unemployment rate falls even though those workers didn't find jobs the second problem is underemployed workers that's part-time workers looking for full-time work they are counted just like anybody else who has a job so there are three types of unemployment that you need to know the first one is called frictional unemployment frictionally unemployed workers are people that are in between jobs or looking for their first job if you move from one job to another either you quit or you were fired you are frictionally unemployed second type of unemployment is called structural unemployment structural unemployment exists when there are changes in the economy which leads to a mismatch in skills for example a lot of electronic repair people have lost their jobs as the price of electronics have fallen it's no longer worth it to pay somebody to repair most of those things as a result those electronics repair people are out of work and may need to go back to school to learn new skills for the new jobs available the third type of unemployment is called cyclical unemployment cyclical unemployment exists when there's an economic downturn in the overall economy that is caused by the business cycle we'll learn about that more in a minute since we will always have some level of unemployment we have what is called the natural rate of unemployment that's frictional unemployment plus structural unemployment it also means cyclical unemployment is zero the next economic indicator we're going to look at is inflation inflation is a general increase in prices throughout the entire economy one way of tracking inflation is through the consumer price index the consumer price index tracks price changes in a market basket of products typically purchased by an urban household the other method of tracking inflation that you need to know on your ap macro economics exam is called the gdp deflator that tracks price changes for all products within an economy we're going to look at calculating and using a gdp deflator first and then we'll get to the cpi the first thing you need to do to calculate a gdp deflator is calculate nominal gdp nominal gdp means gdp that has not been adjusted for inflation in order to find nominal gdp you find the value of the current year's goods using the current year's prices first we're going to calculate the nominal gdp for 2010. we have 2010's quantities and 2010's prices this is for a fictitious economy that only makes lamps and bookshelves we're going to multiply the 2010 quantities times the 2010 prices and that gives us 7 000 for this country's 2010 nominal gdp for 2020 the nominal gdp is the 2020 prices times the 2020 quantities that gives us 20 000 of nominal gdp for 2020. next thing we're going to do is calculate real gdp real gdp is gdp that has been adjusted for inflation in order to find that you find the value of the current year's goods but using the base year's prices 2010 is going to be our base year so those are the prices we're going to use for 2010 since it's both our current year and our base year the real and the nominal are equal at seven thousand dollars for 2020 we're going to use the 2020 quantities and the 2010 prices that gives us a real gdp in 2010 prices of 12 000 for the year 2020. now that we have both nominal and real gdp we can calculate a gdp deflator in order to find that you take the nominal gdp divided by the real gdp times 100. for 2010 since our nominal and real were the same that gives us a gdp deflator of 100. the base year will always have a gdp deflator and a cpi equal to 100. for 2020 we're going to take the 20 000 of nominal gdp and divide it by the 12 000 of real gdp times 100 that gives us a gdp deflator of 166 and two-thirds to work backwards if you are given a nominal value and you want to convert it to a real value you can take the nominal value divided by the gdp deflator times 100 and that will give you a real value for example in 1961 a mcdonald's cheeseburger was just 19 cents if we divide by the 16.88 gdp deflator using 2012 as a base that tells us the real value of that cheeseburger in 2012 was one dollar and 13 cents you can calculate a consumer price index in much of the same way that we just saw what is a cpi well it tracks the changes in prices for a market basket of goods and services here we have a market basket with shirts apples and haircuts and we have both 2010 prices and 2020 prices the market basket has some specific quantities but those quantities will not change this is the weighting of this market basket in order to find the cpi for this market basket we take the current year value of the market basket and divide it by the base year value of the market basket then times 100 this is similar to the nominal divided by real times 100 that we just saw for the gdp deflator if we take the quantities and use 2020's prices that gives us a current value of this market basket of 45 if we calculate it again using the base year prices for 2010 that gives us a base year value of 30 divide 45 by 30 then times 100 that gives us a consumer price index of 150. if you are given two cpi's or two gdp deflators you can calculate the amount of inflation between the two years by using this formula new minus old divided by old times 100 you probably used a similar formula for elasticity coefficients back in micro so if in 1997 we had a cpi of 160 then in 1999 we had a cpi of 176 we can do new minus sold divided by old times 100 we can find out we had 10 percent inflation between those two years inflation doesn't impact everybody equally some people are helped by inflation and some people are hurt the people who are helped by inflation are actually borrowers people in debt actually will pay back fewer real dollars when inflation is higher than expected on the other hand unexpected inflation will hurt banks because they are paid back fewer real dollars savers are also hurt because the money they have saved is worth fewer real dollars as time goes on this video so far has been all about the three macroeconomic goals those are economic growth usually measured by gdp full employment meaning low unemployment or the natural rate of unemployment where there's zero cyclical unemployment and the third thing is stable prices measured by the cpi or the gdp deflator the reason we have trouble meeting all of those macroeconomic goals all of the time is because of this thing called the business cycle the business cycle is the natural ups and downs in a market-based economy's economic activity over time we will have real output increase then decrease then increase then decrease and so on we have some different areas that you need to know we have the expansions those are the times where the economy is on the increase gdp is rising unemployment is falling things are pretty good when the economy declines gdp is falling unemployment is rising we call that a contraction if it lasts more than six months it's often called a recession the peaks are the high points that's where unemployment is low but inflation is often high at the low points we call those troughs there unemployment is high and inflation is often low we may even have some deflation which means falling prices and that's not a good thing as you will learn in future units occasionally our gdp can be above our long run potential output when that happens we call it an inflationary gap the problem that occurs with an inflationary gap is rising prices on the flip side when our actual output is below our long run potential output we call that a recessionary gap then unemployment is usually high and we are in a recession if it lasts a long time when our economy is functioning properly we're also going to have this upward trend in the long run that is our potential output and when it increases like that we call that economic growth we got through it that was a lot of information there and if you knew it all you are on your way to acing your next exam if you need a little more help head down to the links below where there are lots of games and activities from reviewecon.com to help you study and practice the skills you need for that next exam if you want to support this channel make sure you like and subscribe and then head over to reviewecon.com and pick up the total review booklet with everything you need to know to pass your final exam or ap economics exam thank you very much i'll see you guys next time