UnofficialAP MacroeconomicsUnit 2 of 6

AP Macroeconomics Unit 2: Economic Indicators and the Business Cycle

GDP, unemployment, inflation and price indexes.

Unit overview

Macroeconomic indicators tell you how an economy is performing. Gross domestic product measures the market value of final goods and services produced within a country in a year, and can be calculated as $C + I + G + X_n$ . Nominal GDP uses current prices; real GDP adjusts for inflation so that output can be compared across years.

Unemployment is classified as frictional, structural or cyclical, and the natural rate includes only the first two. Inflation is measured with price indices such as the consumer price index, and it redistributes wealth between lenders and borrowers when it is unexpected. The business cycle moves through expansion, peak, contraction and trough around the economy's potential output.

Key topics

GDP: Expenditure approach and what is excluded, such as intermediate goods and transfers.
Unemployment: Unemployment rate, labour force participation and types of unemployment.
Price indices and inflation: Using CPI to compute inflation and real values.
Business cycle: Phases and output gaps relative to full employment.

Worked example

A price index rises from 200 to 210 in one year. Find the inflation rate.

Inflation $= \dfrac{210 - 200}{200} \times 100\%$ .
$= \dfrac{10}{200} \times 100\% = 5\%$ .

Answer: $5\%$

Common mistakes

Counting used goods, financial transactions or transfer payments in GDP.
Treating discouraged workers as unemployed; they are not in the labour force.
Confusing a fall in the inflation rate (disinflation) with falling prices (deflation).

Exam tips

Write the formula you use for each rate before plugging in numbers.
Real interest rate is approximately the nominal rate minus expected inflation; use it for lender and borrower questions.

See the AP Macroeconomics exam format and every unit on the course page.