AP Macroeconomics Unit 2 Notes: Economic Indicators and the Business Cycle

These notes are for Unit 2 of AP Macroeconomics but can be used to help anyone wishing to study GDP, inflation, economic indicators, and the business cycle. In this document, the circular flow of income between product and factor markets is explained and demonstrated with a graph of the circular flow of income. The following components of GDP are defined and explained in-depth: the 3 ways of calculating GDP (expenditures approach, income approach, and value-added approach), what GDP excludes, and the difference between nominal GDP and real GDP (as well as other nominal and real variables). I include examples of how to find nominal GDP, real GDP, and the GDP deflator over multiple years. Equations to find the following values are included: unemployment rate, labor force participation rate, cost of market basket, the natural rate of unemployment, inflation rate, CPI, real wage, real income, nominal GDP, real GDP, and GDP deflator. This document also defines and explains the 3 types of unemployment: frictional, structural, and cyclical. The following components of inflation are also defined and explained in depth: how to find inflation, the substitution bias, the 3 costs of inflation (shoe leather, menu, and unit of account), and whether inflation/deflation benefits borrowers or lenders. Finally, a graph of the business cycle is included and the peak and trough are pointed out. The phases of the business cycle, potential output, and output gap are included.