National Income & Price: every key term you need

GDP Components

GDP = C + I + G + Nx where C=consumption, I=investment, G=government, Nx=net exports. Income approach: wages + profits + interest + rent.

Consumption

Household spending on goods/services. Largest component of GDP (~70% US). Influenced by income, wealth, expectations, interest rates.

Investment

Business spending on capital (factories, equipment). Volatile; sensitive to interest rates and business confidence.

Government Spending

Federal, state, local purchases. Includes salaries, infrastructure, military. NOT transfers (Social Security) - don't count in GDP.

Net Exports

Exports - imports. Positive: trade surplus (export >import). Negative: trade deficit (import >export).

GDP vs GNI

GDP: produced within country. GNI (Gross National Income): produced by country's citizens. Usually similar; differ for countries with significant overseas income.

Price Level

Average prices of all goods/services. Measured by CPI (Consumer Price Index) or GDP deflator. Affects real GDP calculation.

CPI Basket

Fixed bundle of goods/services representing typical consumer. Compare costs: (cost this year/cost base year) × 100.

Inflation Rate

Percent change in price level year-over-year. Moderate inflation (2-3%) normal; high inflation (>5%) problematic.

Deflator

Adjusts nominal to real. Real GDP = (Nominal GDP / GDP deflator) × 100. Accounts for price changes over time.

Aggregate Demand (AD)

Total spending on economy; downward-sloping. Higher price level → lower real spending (wealth effect, interest rate effect).

Aggregate Supply (AS)

Total production; upward-sloping short-run, vertical long-run at potential output.

Unit 3 Summary

GDP measured by income or spending approach. Price level adjusted for inflation. AD-AS model explains output and price interaction.

More AP Macroeconomics guides

• Basic Economic Concepts
• Supply, Demand, Elasticity
• Financial Sector
• Long-Run Growth