Unit 2 Notes

Monday, February 8, 2016

Unit 2 Notes

January 26, 2016

Circular Flow Diagram - represents the transactions within the economy

• Product Market - firms sell goods and services that they produce to the household
• Factor Market - the place where households sell their resources and businesses by their/those resources
• Firms - organization that produces goods/services for sale
• Household - a person/group of people that share income

January 27, 2016

Gross Domestic Product (GDP) - the market value of all final goods and services produced within a nation in a given year.

What's NOT Included

1. Intermediate Goods (needs former processing)
2. Used or secondhand goods
3. Purely financial  transactions (stocks and bonds)
4. Illegal activities (drugs)
5. Unreported business activity (tips)
6. Non-market activities (volunteering, babysitting) 
7. Transfer payments (scholarships)

Gross National Product - total value of all goods and services produced by citizens of that country on its land or foreign land.

January 28, 2016

Included in GDP:

• C - Personal Consumption Expenditures (65%)
• Ig - Gross Private Investment (17%)

1. Factory equipment investment
2. New factory equipment
3. Construction of housing
4. Unsold inventory of products built in a year

• G - Government spending (20%)
• Xn - New exports (2%) Formula: Exports - Imports

January 29, 2016

TWO WAYS OF CALCULATING GDP

1. Expenditure Approach - Add up all the spending on final goods and services produced in a given year
• GDP = C + Ig + G + Xn
2. Income Approach - Adds up all the income that resulted from selling all final goods and services produced in a given year
• W + R + I + P + Statistical Adjustments
• Wages
• Rents
• Income
• Profits
• Indirect business taxes, Depreciation, Net Factor Payment

Compensation of Employees - wages and salaries, could also include pensions, insurance, health, and welfare.

Rents - income received by property owners. From tenant to landlord.

Interest - money paid by private businesses to suppliers of loans.

Corporate Profits - the income of the corporations stockholders. Example: dividends, corporate income taxes

Proprietors Income - comes from entrepreneurs or partners

Budget Surplus/Deficit - Government purchases of goods and services - Government tax in fee collection

• positive = deficit
• negative = surplus

Trade Surplus/Deficit - Exports - Imports

• positive = surplus
• negative = deficit

National Income

1. Add compensation of employees, rents, interests, corporate rents, proprietors income
2. GDP - Indirect Business Taxes - Depreciation - Net Foreign Factor Payments

Disposable Personal Income

• National Income - Personal Household Taxes + Government Transfer Payments

February 1, 2016

Net Domestic Product (NDP) - GDP - Depreciation

Net National Product (NNP) - GNP - Depreciation

Gross National Product (GNP) - GDP + Net Foreign Factor

Real GDP - The value of output produced in constant base year prices

• adjusted for inflation
• If wanted to measure economic growth, use real GDP. 
• can increase from year to year only if output increases
• P x Q

Nominal GDP - The value of output produced in current year prices

• An increase in prices (inflation), use nominal GDP
• Can increase from year to year if either price or quantity increases
• P x Q

GDP Deflator - a price index used to adjust from nominal to real GDP

• In the base year, GDP deflator always equals 100
• For years after the base year, GDP deflator is greater than 100
• For years before the base year, GDP deflator is less than 100
• (Nominal GDP/Real GDP) x 100

Consumer Price Index (CPI) - the most commonly used measure of inflation

• Measures the costs of a measure basket goods of a typical American family.
• Cost of a Market Basket of Goods in a Given Year/Cost of a Market Basket of Goods in the Base Year) x 100

Inflation Rate 

• Price Index in Year 2 - Price Index in Year 1/Price Index in Year 1) x 100

February 2, 2016

Nominal Interest Rate - the percentage increase in money the borrower must pay the lender for the loan. Not adjusted for inflation.

Real Interest Rate - the percentage increase in purchasing power the borrower must pay the lender for a loan.

• Adjusted for inflation
• Unanticipated inflation
• Nominal Interest Rate - Inflation

Anticipated Inflation

• Fisher effect
• Nominated Interest Rate
• Expected Interest Rate + Inflation Premium

Hurt by Inflation

1. Savers
2. Lenders/Creditors
3. People in a Fixed Income (elderly, welfare)

Helped by Inflation

1. Debtors

Cost of Living Adjustments (COLA) - Automatic wage increase when inflation occurs. Example: New York, California

February 4, 2016

Unemployment - the failure to use available sources, particularly labor to produce desired goods and services.

Labor Force 

• Above 16 years old
• Able and willing to work
• Employed and unemployed
• Not in Labor Force
• Military
• students
• retired
• disabled
• home makers
• mental institutions 
• jail/prison
• those not looking for a job

Unemployment Rate - Full employment or Natural Rate of Employment (NRU)(4-5%)

• (# of Unemployed/# of Employed + # of Unemployed) x 100 = NRU
• Frictional + Structural = NRU

Types of Unemployment

1. Frictional Unemployment: those who are searching for a job
• temporarily unemployed; in between jobs
• transferable skills
• college and high school graduates
• possibly laid off from job
2. Structural Unemployment: changes in the structure that makes some skills obsolete
• do not have transferable skills
• have to learn new skills
3. Season Unemployment: due to the time of the year and nature of the job
• school bus drivers, life guards
• Santa Claus, Easter bunny
• Construction workers
4. Cyclical Unemployment: results from economic down turns such as recession
• as demand for goods and services fall, the demand for labor falls, and workers are laid off

February 5. 2016

GDP Gap - the amount, by which actual GDP falls short of potential GDP

Okun's Law - for every 1% in which the actual unemployment rate exceeds the natural unemployment rate (NRU), a GDP gap of about 2% occurs

• in 2012, the unemployment rate for Mexico was 7.4%. the NRU for Mexico is 6%.
• (Actual Unemployment Rate - NRU) x 2
• 7.4-6=1.4x2=2.8

Rule of 70 - used to determine how many years it takes for a value to double, given a particular annual growth rate.

• if you put $20,000 in the bank, and it earns a yearly interest of 7%, how many years will it take for your income to double? 10