AP® Macroeconomics

Swipe right and get to know knowledge about the big-picture economy

  • Course Length: 18 weeks
  • Course Type: AP
  • Category:
    • College Prep
    • History and Social Science
    • High School

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So, what's the deal with all the arguing between politicians about tax cuts, economic stimulus plans, and trade agreements? Undoubtedly, part of the answer is that politicians just love to argue with each other. A bigger part of the answer, though, is that these sort of policies have a huge impact not only our nation's economy but on the global economy as well.

In this course, we'll get to the bottom of those policies and the macroeconomic theories behind them. From the basics, like aggregate supply and demand, to the crazy complex stuff, like foreign exchange markets, Shmoop has got your back. Not only will this class prep you for the AP Macro exam, but it'll also arm you with every bit of economic knowledge you'll need to smack down loud-mouthed know-it-alls at the dinner table or online.

Know someone who won't stop talking about the need to increase trade barriers with China? Bam! You'll be able to hit them with what you know about specialization and competitive advantage, and how trade benefits both nations.

Know someone who wants to remove all of those regulations in order to unleash economic growth? Bam! You'll be equipped to whack them with what you know about externalities and income disparity to set them straight. 

Gloating afterward is totally optional.

In this course, we'll learn how to

  • describe, compare, and contrast aggregate demand and aggregate supply and discuss how these concepts are used to evaluate the country's macroeconomics.
  • calculate Gross Domestic Product and explain how it helps us assess the health of the economy.
  • compare and contrast fiscal policy and monetary policy in terms of how they are used to improve the health of the economy (or crash it).
  • articulate how the nation's banking system works and contributes to the country's economy, including describing the role of the Federal Reserve.
  • differentiate between a "real" value and a "nominal" value when evaluating key measures such as price level and inflation. 
  • define economic growth and evaluate its determinants. 
  • determine comparative advantage and assess the role it plays in international trade.

That's not all, of course. There is more…so much more…this is AP Macroeconomics, after all, and "macro" means big. 


Unit Breakdown

1 Basic Economics Concepts

2 Measurement of Economic Performance

3 National Income and Price Determination

4 Financial Sector

5 Stabilization Policies

6 Economic Growth

7 Open Economy: International Trade and Finance


Sample Lesson - Introduction

Lesson 6.02: Determinants of Economic Growth: Human Capital and Physical Capital

Someone holding a handful of berries.
People want berries. We want money. Seems like a fair trade.
(Source)

Nature is wonderful. Birds singing, flowers blooming, bunnies frolicking. When the skies are blue, the mountains are singing. Ahh, there's nothing like looking at nature, enjoying it, doing nothing. We call that "relaxing." And it's good stuff.

However, since we call this AP Economics, we need to think beyond being one with nature and think: choices. Think: needs. Think: wants.

An entrepreneur might look out at nature and see, in additional to butterflies and rainbows, an opportunity for adding to the GDP. Or, as we are more likely to phrase it, a chance to make some serious cash.

Not much can beat fresh-picked berries (as long as they aren't poisonous), but not many people want to traipse into the woods, find a berry patch, fight off bees, and pick a bucketful. As entrepreneurs, though, we might be more than willing to provide our berry-picking services in exchange for cash, particularly if we have some mad berry-picking skills.

It's a win-win-win all around. They get berries, we get money, and the GDP gets a little bigger.


Sample Lesson - Reading

Reading 6.6.02: Humans and Hummingbirds—It All Comes Down to Production

Basic economic wisdom states that the factors of production are just the inputs we use to create goods and services that help businesses make money. All businesses need land, labor, capital, and a dash of entrepreneurial spirit (because why else would we take such a risk?).

Depending on the type of business we're talking about, we could get into a pretty decent argument on which factor is the most important. For example, our start-up berry-picking business would require a lot of land and a lot of labor, but—if we're picking berries in the woods—we don't need a lot of capital, just some bug spray and few buckets to put the berries in. Maybe a few signs to advertise, but that's about it.

Now, if we start to get a lot of business, and want to start selling our berries in supermarkets, we'll have to invest in some more capital. Probably a factory or two to sort and package the berries. We'll need trucks to deliver them to the stores. We'll have to hire a creative team to come up with a mascot to make kids think the berries are cool. And so on and so forth.

Power to the People

So we can see how the factors of production can change drastically, but let's think small for now. We're still a humble two-person berry-picking business. Our strength lies in our human capital right now (okay, and having berry bushes, but they're another story for another day).

The human capital—that's us—is where the necessary knowledge, skills, and technical expertise come from. Berries aren't going to pick and sell themselves! Oh yeah, and human capital also includes the motivation required to start and complete the task, as opposed to just binge-watching Brillopad Bill cartoons online.

In short, what people bring into the workplace actually brings in economic value. If we hire Sherri to pick berries, and she picks thirteen pails per day, she's bringing value to us through her work.

However, if half of Sherri's thirteen pails contain squashed, un-sellable berries, then she's less valuable than Jerry, who picks eight pails or perfect berries because Sherri's not producing as much and it takes time to sort out the good from the bad.

But if Jerry is unreliable and doesn't always show up, then Sherri becomes more valuable once again because a bird in the hand is worth two in the bush. Even though we're not picking birds.

Needless to say, measuring the value of human capital is more than a little tricky since not everyone has the same skills, same knowledge, or same drive.

If we want to get crazy and get really specific, and we totally do, we should know that human capital includes social capital. We aren't talking about popularity contests here but rather an agreed upon system of behavior by members of a social group. Rules. Laws. Guidelines. Expectations. Not too exciting, we know, but without them, who knows what chaos would ensue?

Businesses can't operate without some form of social capital because it's those guidelines that make sure people pay for the goods and services they purchase and that keep businesses from selling poison berries to unsuspecting buyers (except in fairy tales because poison fruit is a huge staple in fairy tales).

The Other (non-people) Stuff

Physical capital brings far less confusion than Sherri and Jerry. Since physical capital isn't human, we don't have to worry about sick days or personal drama. These humanmade goods are the computers, the tools, the buildings, and the technology that we use to manufacture the goods and provide the services.

Remember, don't confuse natural resources (the berries, the bushes, the woods, the land) with physical capital.

For berries, our physical capital is pretty simple: buckets and a sink to wash them in before they hit the sale table. The more complex the product or the service, the more physical capital we'll probably need.

Now, let's say that we notice that about 50% of the berries remain unpicked because the workers can't physically reach them. That's a lot of money we're losing. Remember, we can't just yell, "PICK MORE BERRIES!"

We have a choice. We can increase human capital, or we can increase physical capital. In this case, hiring more people won't make the berries easier to reach, so we need physical capital. It turns out that we can buy special remote-controlled hummingbird robots that can reach the hard-to-reach berries and pick them.

With the introduction of this new physical capital, our workers are now able to increase their productivity. In short, increasing physical capital can increase productivity.

But a word to the wise—everything has its limits. Physical capital can depreciate due to wear and tear, upgrades may be required, and technology can become outdated. Humans are just as susceptible to depreciation, which can occur due to technological advances, a lack of training, injury, or mental decline.

Recap

Human and physical capital are two factors that make the production of all goods and services possible. Without humans to bring in the knowledge, skills, and motivation, the machines would either sit unused or run below capacity. The end result would be lower (or no) production, lower quality of goods, and a lot of going-out-of-business signs.


Sample Lesson - Activity

  1. True/False: Factors of production include land, labor, and capital, but never entrepreneurial spirit because that is an abstract concept.

  2. True/False: Without human capital, it is likely that the economy would suffer from significantly lower levels of production, products would be of lower quality, and many a business would close.

  3. It's time to realize our dream—owning a shoe store. We have amazing shoes. People will want to buy our shoes. We have such great shoes that we will put Zappys.com out of business. However, first, we need something very important. This something provides us with the necessary knowledge, technical expertise, and skills that are required to run a business. What is this special something?

  4. An agreed-upon system of behavior helps keep people in line. We agree to follow rules and guidelines and laws and, in return, society functions pretty smoothly. What would we call this system that provides us with these expectations?

  5. When we talk about physical capital, we are referring to __________.

  6. When Mariella began planning her left-handed pencil factory, Arabella recommended that she hire a few people who already knew how to run the machines so that they could train the other new hires. These experienced new hires, who will bring additional value to the factory, are great examples of __________.

  7. Which statement below about human and physical capital is inaccurate?

  8. Sage is having a bit of trouble keeping his food truck business afloat, so he sends Tim a text asking for some guidance. Thinking in terms of social, physical, and human capital, read Sage's text messages and choose the one that is causing at least some of the problems.

  9. Snow and Rose run a very successful hot pretzel company on the South Side of Charmville. They've had the store for seven wonderful years, and are looking forward to many more. All is awesome. However, Snow has noticed that the mixer is starting to make a funny sound and that the oven isn't as hot as it should be at times. These issues with the physical capital are indicative that something inevitable is happening. What would that be and how could they solve it?

  10. At Gaston's House of Cards, one can buy decks of cards. It's good stuff, and he does pretty well. However, more and more people want to buy pre-shuffled cards. He provides a hand-shuffling service but doesn't have a shuffling machine like his competition offers. However, card popularity is up in general, so he's still doing a booming business. His buddy Fou recommends buying a shuffling machine and hiring more people, and Gaston says he'll think about it. Which points below should he consider when it comes to deciding whether to increase his business's human and physical capital?

  11. Our hat-making business is booming. In fact, we are ready to double our production and start pumping out 2000 hats per day. Right now, we have ten employees and ten machines, which allow us to make 1000 hats per day without a problem. If we want to make 2000 hats, we need an additional ten machines. What would happen if we increased physical capital and not human capital?

  12. As we prepare our sales pitch to our investors, we need to think of reasons that they should provide us with additional funds to purchase up-to-date machinery and replace the machines that we've had for the last ten years. Everything still works, but the machines break a little more easily, and it's not always easy to find replacement parts. Also, the technology that runs the machines is outdated. Read the statements below and choose the one that would make our pitch most effective.

  13. Human capital provides the know-how that is required to run—and to grow—companies. Humans are the one who come up with the ideas necessary to create new companies, to improve on processes, and to invent new goods and services. If we didn't have skills, knowledge, or drive to do any of that, it's likely that our economy would stall out or go into decline.

  14. Determining the value of human capital can be tricky, to say the least. What does an employer need to think about when determining the value of his or her employees? Why?

  15. We've got a pretty good group of employees in our company. They're all average or better in terms of how well they do their jobs. We can count on them to come to work regularly, and we know that they know what to do. However, time marches on. While we know that we can count on our employees (our human capital) today, what should we take into consideration as we look toward the future?


Sample Lesson - Activity

Activity 6.02c: Book 'em, Danno

What determines economic growth? That's what we call the $64,000 question (which is a reference to a really old television game show BTW).

In this activity, we'll set out to answer that question in the form of a children's book, but fair warning: you won't be winning $64k, even if you do a great job, because, honestly, who can put a value on knowledge? Right? Right?!

All mock enthusiasm aside, this activity is a fun one, or at least more fun than stuffy essays. Your mission is to create a children's book that explains to a ten-year-old the answers to the question what determines economic growth? Here are all the details:

  • Your book should include pictures. You can draw them yourself or copy and paste pictures from the internet (just include the URL from your source). Stick figures and speech bubbles are A-OK, so don't freak over not being Picasso. 
  • Your book should include text (in your own words, of course) to narrate your brilliant exposition on growth. Make sure you use plain language and explain your points because the readers, unlike you, are not quite AP experts.
  • Your book should be eight pages minimum, which sounds like a lot, but that's eight pages with text and pictures, so it's not really that much.

Before you go all panicky and stuff…take a deep breath and read on.


(Source)

Start with the obvious: production and what goes into making things. Then talk about human and physical capital. Tell us how these help businesses make what needs making. Tell us how they affect the economy. Talk, too, a wee bit about social capital since it's kinda inextricably linked to the business. And, finally, make sure that we know that we live in a world where limits exist. So we need to know about depreciation. Otherwise, those little kids might think that everything lasts forever, which is totally impossible. Except for Twinkies. They're immortal.

Oh, and be creative and have fun with the book. That's important, too.

When you're done, upload your completed project below. (If you created the book on the computer, just save it and upload it. If you drew your book by hand, then scan or take pics of the pages and upload those.)