Macroeconomic Measures of Performance Rapid Review for AP Economics

By — McGraw-Hill Professional
Updated on Mar 2, 2011

More in-depth study guides for these concepts can be found at:

Circular flow of economic activity: a model that shows how households and firms circulate resources, goods, and incomes through the economy. This basic model is expanded to include the government and the foreign sector.

Closed economy: a model that assumes there is no foreign sector (imports and exports).

Aggregation: the process of summing the microeconomic activity of households and firms into a more macroeconomic measure of economic activity.

Gross Domestic Product (GDP): the market value of the final goods and services produced within a nation in a given period of time.

Final goods: goods that are ready for their final use by consumers and firms, e.g., a new Harley-Davidson motorcycle.

Intermediate goods: goods that require further modification before they are ready for final use, e.g., steel used to produce the new Harley.

Double counting: the mistake of including the value of intermediate stages of production in GDP on top of the value of the final good.

Second-hand sales: final goods and services that are resold. Even if they are resold many times, final goods and services are only counted once, in the year in which they were produced.

Nonmarket transactions: household work or do-it-yourself jobs are missed by GDP accounting. The same is true of government transfer payments and purely financial transactions like the purchase of a share of IBM stock.

Underground economy: these include unreported illegal activity, bartering, or informal exchange of cash.

Aggregate Spending (GDP): the sum of all spending from four sectors of the economy. GDP = C + I + G + (X - M).

Aggregate Income (AI): the sum of all income earned by suppliers of resources in the economy. With some accounting adjustments, aggregate spending equals aggregate income.

Nominal GDP: the value of current production at the current prices. Valuing 2003 production with 2003 prices creates nominal GDP in 2003.

Real GDP: the value of current production, but using prices from a fixed point in time. Valuing 2003 production at 2002 prices creates real GDP in 2003 and allows us to compare it back to 2002.

Base year: the year that serves as a reference point for constructing a price index and comparing real values over time.

Price index: a measure of the average level of prices in a market basket for a given year, when compared to the prices in a reference (or base) year. You can interpret the price index as the current price level as a percentage of the level in the base year.

Market basket: a collection of goods and services used to represent what is consumed in the economy.

GDP price deflator: the price index that measures the average price level of the goods and services that make up GDP.

Real rate of interest: the percentage increase in purchasing power that a borrower pays a lender.

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