hey guys this is Jacob Clifford welcome to the macroeconomics unit to summary video in this video I'm gonna explain all the concepts that you need to know first thing go grab the study guide that goes with unit 2 this is part of the ultimate review package fill that out along the way to verify you're actually getting the concepts remember these videos aren't designed to teach you all the concepts again I have videos on YouTube that do that these videos are designed to get the concepts back in your brain and make sure you know them well enough to get ready for your test or the AP exam before whatever you have in the future that's why the study guide is gonna help you learn if you can fill this out then you get it if you don't know this you gotta go back to YouTube watch some videos over again now before I cover any of the topics in unit 2 keep in mind that macroeconomics is the study of the whole economy and it's designed to do two things 1 measure the health of the economy that's a lot of damage and to fix it let field work so a macroeconomics class will focus on both these things so here in unit 2 we're going to talk about measuring the economy we will look at how to measure growth and unemployment and inflation and then in unit 3 we'll talk about how to show some those concepts on a graph and then in the end of unit 3 and all through unit 4 and you know 5 we'll talk about the second part which is fixed in the economy with fiscal and monetary policy and finally in unit 6 we'll talk about the other part of the economy which is international trade foreign exchange and things that have to do with other countries so I just wanted to give you that quick overview before we jump into all the concepts we're about to learn here in unit 2 so let's go now remember I'm sticking to the AP macroeconomics curriculum but if you're a college student or if you're taking the CLEP exam it's all the same introductory macroeconomics covers the same topics but these are the topics I'm going to cover in this exact order so here we go the first one I'll talk about is GDP and the circular flow model then I'll talk about the limitations of GDP and how GDP doesn't actually measure everything then I'll talk about the idea of unemployment then I'll jump into the whole idea of inflation how to measure inflation with price indices and the inflation rate and the CPI next I'll talk about the cost of inflation so who's helped and who's hurt by unanticipated inflation then I'll talk about real and nominal GDP and finish it off with the business cycle the key to understanding this unit is to remember that every economy has three goals to grow over time to reduce unemployment and to keep prices stable and that's what we're doing in this unit we'll talk about GDP and how do you measure growth we'll talk about unemployment and how measure unemployment and last one we'll talk about inflation how do you keep prices stable and it all starts with GDP gross domestic product so here in topic 2.1 we're talking about GDP and the three different ways to measure it the expenditures approach income approach and the value-added approach also talked about what's included and not included in GDP now I've already made a video that explains topic 2.1 in detail so do me a favor take out the study guide for two point one fill out that whole section and let's see if you actually understand those concepts you can figure out those equations and you can actually answer all these if you can do that that means you get it so right now stop this video fill out the study guide and then start the video back up again okay here we go remember the definition of GDP is the dollar value of all final goods produced in a country's border any given year so remember the key to that is the final goods we're not looking at intermediate goods we're talking about inside the country's border in a year but keep in mind that we're talking about both goods and services so a lot of teachers and professors will give you questions will ask you does this count toward GDP does that count or GPS what about goods and services so like tuition for college does count towards GDP because something was provided a service was given and like I said earlier there's three ways to measure the GDP the first one the expenditures approach is by far the most important one it adds up all the spending on all the goods and services in the country and it gives you the most important equation in all of macroeconomics it's right here C plus I plus G Plus X n remember all the things around you can be purchased by one of four different entities the first one is consumers and the vast majority of the United States economy is consumer spending that's people like you and me buying stuff the second one is investment which is businesses buying stuff usually we're talking about capital so machines tools and factories that's business spending which we call investment and of course there's government spending so we're talking about infrastructure like roads or government spending on national defense or services provided but not transfer payments a transfer payment is when the government gives money to people like Social Security or welfare and they're not providing a good or a service again this is the kind of thing that Professor a teacher likes to ask they're going to ask okay the Social Security count as part of government spending and the answer is no because nothing new was created I'll talk more about that in a second the last part of the equation is net exports exports minus imports again I say this is the most important equation because it is you're gonna see it all over the place in unit 3 and unit 4 we're talking about fixing the economy a lot of times we're going back to this equation to say okay what is the government trying to do here who are they trying to increase the spending for how they trying to expand GDP now the other way to measure GDP is the income approach which is not adding up all the spending it's adding in all the income from all that spending the equation here is not as important as the expenditures approach but you got to know it it's the idea that wages plus rent plus interest plus profit equal the total income made in the economy the GDP and it's important to keep in mind that we talked about income like national income that's just the same as GDP income spending same because whatever people spend is what people make in income the last way to measure GDP is the value added approach and this adds up all the different value added at each stage of production in the production process we go from raw materials to finished product and along the way there's value added by different companies and that value added can be added up and that's a value added approach and the last thing you have to learn here in topic 2.1 is the circular flow model now again I made a video explaining all of it it's on YouTube so I want you right now to go to the very end a study guide the last page in this unit and fill out that awesome chart that's right there so take all the words in the word Bank and plug them into the blanks to verify you understand the circular flow and understand how GDP is actually created stop this video and start it back up again the one thing you got to remember in the circular flow households both demand and supply they demand in the product market but they supply in the resource market and businesses supply and demand too they supply in the product market but they demand in the resource market which reminds me keep in mind your teacher might use the term factor market instead of resource market because factors of production it's all the same stuff on the top here we're looking at the factors of production land labor and capital it's owned by the individuals and sold to the business the businesses then take those resources and convert them into goods and services and sell them to the individuals the households now the video I put up on YouTube has households and businesses and that's the private sector when you add in the government that's the public sector now on the chart in the study guide in the ultimate review packet I also added the financial sector but the key to this is to understand how it's related to GDP notice all the spending by households is just consumer spending and all the spending by businesses well that's investment of course there's also government spent remember that's three of the four components of GDP C I and G and again in this chart actually don't have net exports I didn't bring in other countries but I could add that I didn't because it just get complicated and ugly but here in unit 2 you need to understand an overview of how the economy works and the circular flow is gonna explain that for you don't freak out usually teachers and professors don't have you actually draw this thing out and make sure you can label all these this is just gonna help you get an overview of how the economy works now I'm moving on to macroeconomics topic two point two in this case we're still talking about GDP we're talking about its limitations the first thing you have to remember is that GDP doesn't include all goods and services there's several things that are not included for example intermediate goods goods that are used in the production of a final good don't count towards GDP for example the microchip inside your phone or your computer that you're watching this video on doesn't count separately in GDP it's part of the finished product so GDP counts that laptop or the phone not all the components that went into the phone and GDP doesn't include non production transactions so things like the stock market don't count towards GDP because nothing was produced and use goods don't count toward GDP for this year if they're sold in a previous year it counts in previous years GDP but not this years if it's resold again and of course illegal or non market transactions don't count in GDP because we don't know that they exist and they're being done on the table or illegally so right now on the study guide topic two point to fill out that section and answer those true/false questions because I think that's the best way to see if you understand the concepts and really get it is to give you some scenario to see if it counts or doesn't count towards GDP again I made a video explaining all these concepts in detail if you still are really confused go back and watch this video then jump back into the summary video so here in topic 2.3 we're talking about unemployment there's a lot of concepts you have to understand like a lot of vocab the labor force labor force participation rate unemployment rate the different types of unemployment the natural rate of unemployment so it's kind of heavy on the vocab and there's a little bit of calculations you have to do your teacher professor might give you a scenario say here's how many people in society here's many people in the labor force here's how many people unemployed calculate the unemployment rate and this is a skill you're gonna see a lot so you have to feel comfortable with it understand the idea of how to calculate percent and how to calculate percent change calculating percent is easy it's just the number you have divided by the total times 100 that pops had a number and that's the percentage and keep in mind from teachers and definitely for the AP test these are gonna be easy numbers easy to calculate the answers would be 10% 20% 5% it's not gonna be like seventeen point two eight percent though there are some professors that are crazy that do stuff like that but really you're not gonna see that and four percent change you just take the new number subtract out the old number divide that by the old number and then multiply that times 100 and that give you the percent change between those numbers remember that people are not unemployed unless they're actually looking for work so if they stop looking for work they actually believe the labor force and they're no longer part of labor force no longer count and remember when you calculate the unemployment rate you're not looking at the number of people and then total population you're just looking at number people who are unemployed compared to the labor force in other words we don't count children or people who are too old to work or people they're not looking for a job only people looking and able to work they count as employed or unemployed that's the labor force to verify you actually understand and can calculate all these things do questions one through five on the study guide that will verify you're actually getting now in addition to these kind of numerical equation questions you get a lot of questions about who's counted and not counted as unemployed by your teacher or professor and there's two things you've got to watch out for the first one is discouraged workers these are people who have left the labor market they've been unemployed for so long they've been trying to find work but they've given up they're no longer counted as unemployed because they're no longer part of the labor force you'll see questions on that you'll also see questions about part-time workers remember if you're a part-time worker and you want more hours that doesn't make you unemployed you're still fully employed so part-time workers folding employ they don't count as unemployed go ahead and answer question six seven and eight and topic two point three on the study guide that'll get it back in your brain and verify you understand that concept now let's move on to the other most important thing here unemployment is the three types of unemployment frictional structural cyclical you're gonna have to be able to define each one of these and give examples in fact a lot of teachers ask questions where they give you you know a scenario of different people and say which one is frictional II unemployed or which one is structurally unemployed you got another difference and you know this frictional unemployment are people that are between jobs so someone who just got out of college looking for their first job there fictionally unemployed they have skills people want to hire them they just haven't found a job yet structurally unemployed are people who do not have the right skills that people don't want to hire because the structure of the labor market has changed these are people like VCR repair men who don't have a job because people don't have VCRs and don't need that skill so structural unemployment that's going to exist in the economy and the last one is cyclical unemployment that's the idea there's a recession the economy's doing poorly people are buying less goods and services and so workers are losing their jobs cyclical unemployment an easy way to remember that is it's because the economy is sick so it's cyclical unemployment and that's important to remember because sometimes the economy are sick and doing horrible or sometimes it's not and it's doing great but either way you're gonna have the first two types of unemployment you're always gonna have frictional people between jobs and you'll always have structural and this is a huge concept when we're talking about unemployment and limiting unemployment we're not trying to get it down to zero because two of them will always is this so the whole idea of the natural rate of unemployment is the amount of unemployment that exists when we're at full employment when there's no cyclical unemployment now what that actually number is depends on the country but the United States basically it's between four to six percent unemployment that's considered full employment if we have by eight percent unemployment then deaf when we have some cyclical employment and we have a recessionary gap or a recession but in other countries the natural rate of unemployment can be higher you have more frictional and structural employment permanently in other countries that have higher unemployment benefits to their citizens and basically people are between jobs longer because they can get some money from the government but that's not the big takeaway the big takeaway here is remember when we talk about full employment we're not talking about zero percent unemployment you can't even get to that it's not possible we're talking about the amount of unemployment that exists at full employment when there's both frictional and structural employment and no cyclical right now finish off topic two point three on the study guide in the ultimate review packet to verify you understand these concepts okay you're jumping into topic two point four price indices and inflation remember overview there's three things that every economy wants growth over time which we measure with GDP unemployment to reduce unemployment which we look at the unemployment rate and this last one we want to keep prices stable and that's we're talking about here with inflation now up to this point this unit seemed very easy it feels like a social science it's kind of out of vocab concepts now you have to jump into more calculations we talked about something called the Consumer Price Index the CPI is the most commonly used measurement of inflation and basically they take a market basket of goods and services and track that over time to see if prices went up or down and you might be thinking well prices go up for everything over time but not always some products actually fall in price over time but generally yes prices go up that's called inflation now sometimes prices fall that's called deflation and there's another thing called disinflation when the inflation is going up higher faster faster faster but eventually starts to level off it's going up at a slower rate that's called disinflation anyways back to CPI it's one of those things you have to absolutely be able to calculate it's the value of the market basket that you're given for some given year divided by that same value of the same market basket in some given year the base year times 100 it pops out a number that number is a CPI the CPI for the base year is always 100 and any other given year and has a different number and that tells you how prices change relative to the base year for a lot of students doing those calculations and answering CPI questions is one of the hardest things in this unit so right now fill out the study guide for questions three four and five for topic two point four see if you actually can do those calculations if you can't or you want more practice check out the video inside the ultimate review packet where I have you study and practice just CPI the whole video covers just practicing that skill and in addition to the CPI there's also something called the GDP deflator which instead of just looking at a market basket it's looking the value of everything so the equation here is the nominal GDP divided by the real GDP times 100 gives you the GDP deflator again it's not the same as the CPI because looking at all goods and services in the economy not just consumer goods but the concept is very similar we're looking at the value of the market basket in this case everything the nominal GDP divided by the value of that in a base year adjusted for inflation the real GDP times 100 in a summary video like this my goal is to get the concepts back in your brain not to practice those individual skills over again so right now try questions 8 through 12 on the study guide if you can answer them then you get it if you can't answer them go watch another video on YouTube to verify you understand that nominal and real GDP and calculating GDP deflator now there's one more thing I want to cover in this topic the CPI is not perfect and your teacher might ask you questions about that the problems of CPI the first one is this substitution bias when the price goes up for like chicken the CPI says all the price for chicken went up but people might actually stop buying chicken and go buy something else instead like pork or beef or just not buy chicken buy some other food so products can be substituted away from even though the inflation rate says it's going up and the CPI says prices have gone up for some sort of good people might actually be buying that good and the other problem is new products the CPI tracks a market basket over time but when a new product that never existed before is added to that market basket you really can't measure its price because it's not in previous basket and the last one is product quality the CPI looks at inflation over time but it doesn't analyze anything about the quality of those goods and services for example a computer from 30 years ago is way worse than the computer you have now the prices maybe says it went up by a hundred percent or two hundred percent but the quality like went up by a million percent and I'm just throwing this in just in case your teacher asked you questions about this but remember this topic is all about doing the calculations understanding what CPI is how to calculate it what's the GDP deflator and how to calculate it if you're watching this video to self study don't think that my few minutes I'm just talking about what CPI was enough you've got to sit down and you've got to practice it alright now we're moving on to topic two point five this is the cost of inflation the big concept here have to understand is who has helped and who has hurt by unanticipated inflation but your teacher professor is going to give you as a t-chart like this the first thing that the remember is the people who are hurt by inflation the most are lenders who lend at a fixed interest rate so if I give you money at a 6% interest rate and inflation is 2% that I expect a 4% return but if inflation ends up being 10% I'm actually losing money on this deal I'm actually getting paid back dollars that have less purchasing power than I expected and people with fixed incomes so they make $1,000 a month when there's inflation that's going to erode their purchasing power so they're hurt by inflation and so our savers and the other side the people who were helped or benefited by unanticipated inflation are borrowers when you take out a loan and there's more inflation than expected then you're paying back dollars with lower purchasing power so that actually helps you as a borrower another person that might benefit is a business where the price of the product increases faster than the price of the resource in the short run actually now is a good to talk about why you should be learning this stuff yes I know you want to pass an AP test and do on your final but the real reason you want to understand inflation is someday you're gonna have a job and you're gonna have to negotiate your salary and if there's a 2% increase in inflation you gotta go to your boss and say listen I need a 2% increased my wage that's the concept right here your nominal wage is your wage not adjusted for inflation your real wage is adjusted for inflation so for example if your boss says hey we're giving you a raise a 3% raise this year but inflation went up 5% then you actually your real wage fell 2% if I lost you there don't worry about it just understand the idea nominal is not adjusted for inflation real is adjust for inflation we'll come back to that later and now is later topic 2.6 talk about nominal and real GDP there's obviously a problem when you calculate the dollar value of all final goods and services produced in the country in a given year what about the price of those goods and services in other words you know Venezuela right now might have a huge GDP because the price of everything is astronomical and economists don't like that so they make an adjustment they convert the nominal GDP to a real GDP which you did earlier with the GDP deflator so economists don't really analyze the nominal GDP of a country they'd like to analyze the real GDP remember the nominal GDP is measured in current dollars real GDP is adjusted for inflation now you might be asking yourself okay what kind of question is my teacher or the final exam of AP tests can ask me let's actually do a practice question here remember that the GDP deflator like the CPI is an index number it's not a percentage but you can get the percentage if you understand what you're looking at so what I want you to do is calculate the nominal GDP write that down stop the video verify you got it then start the video back up again so if the real GDP adjusted for inflation is 200 billion dollars but the nominal GDP has to be higher than that right because it says prices increased 20% the GDP deflator cents 120 20% increase in prices since some base year so the nominal GDP the one that's not adjusted for inflation has to be 240 billion dollars again like I said with unemployment and other things in this class usually your teacher professor is not going to give you super hard numbers they're gonna be easy to calculate numbers you can kind of do in your head again if you're totally confused go watch the practice video where I have you practice CPI and the GDP deflator ok here we go the last topic this unit 2.7 we're talking about business cycles and it has the key graph which is right here as you know the economy goes up and down over time there's four phases to the business cycle there's a peak there's a recession also called a contraction then there's the trough and then there's the expansion or recovery and it keeps doing that over and over and over again I made a video on YouTube where I talked about this in detail but I want you remember the key here is there's a difference between a recession and a recessionary gap okay we're looking at the real GDP over time and this line here represents full employment the idea that we have frictional and structural but no cyclical employment this is when the economy is doing great representing a trend line full employment that's called our potential GDP but our actual GDP goes up and down over time a recession is when the real GDP is actually falling but down here the GDP is actually going up but we're still in a bad situation because the actual GDP is below the potential GDP in other words we're not at full employment this is called a recessionary gap or a negative output gap and the opposite is up here this is called a positive output gap in this case the economy is moving faster than full employment which means frictional and struction employment are really lower like two percent unemployment and we're gonna get more inflation now trust me you're gonna see this concept again and again in the future particularly in the next unit we learn about something called a grits man and you draw all these concepts on a different graph okay to help you learn this I want to put the business cycle next to the production possibilities curve that you learn back in unit 1 now I didn't teach this to you before but really the production possibilities curve has two separate lines here this first one right here represents full employment the idea we have frictional and structural employment but no cyclical unemployment so four to six percent unemployment the economy is doing great the outside line represents maximum capacity and 0% unemployment which we said couldn't even be done in the first place it's important when you see these graphs so you understand how they're related to each other so a recession on the business cycle or a negative output gap is here on the preps Buster's curve it's right here we have high unemployment the economy is doing terrible the full employment looks like this on the business cycle with that point and four products by squeezed curve it's on that line the idea of full employment but a positive output gap when we have higher inflation is right here on the business cycle and right he on the production possibilities curve right now it's time to fill out topic 2.7 in your study guide fill that sucker out verify you understand the idea of the business cycle I know I went quick in this summary video and I'm doing that on purpose because I'm trying to get the concepts back in your brain now if you come across things you just do not understand try some multiple-choice practice questions or in the ultimate review packet go ahead and try filling out one of the practice sheets or watch one of my other videos where you practice very specific skills a complete list of all my videos organized by topic or in the ultimate review packet or right now it's totally free you can check it out but overall this is one of the easier units I would give it a two point five out of five in terms of difficulty we're gonna move into harder units though with units three and units four there's gonna be more graphs and more calculations thanks for watching until next time hey thanks so much for watching this video if you liked it please subscribe and like and leave a comment so I know what I can do to help you learn and love economics thanks for watching until next time