1/26/16
Circular Flow
-Circular flow represents the transaction in economy.
-There are two markets, the product market and the
factor market.
-In the product market, firms sell goods and services
that they produce to the household.
-In the factor market, the households sell their
resources and business by their resources.
-Firm, it is an organization that produces goods and
services for sells.
-Households is a person or group of people that share
their income.
1/27/16
-Gross domestic product (GDP) is the market value of
all final goods and services produced within a nation in a given year. It is so
prevalent each country has GDP.
What is Not Included in GDP
I.
Intermediate
goods are a good that include at requires further processing before they’re
ready for final use, examples include parts of a car, door without the glass
insert.
II.
Used
or second hand goods
III.
Purely
financial transaction (stocks and bonds)
IV.
Unreported
business activity (unreported tips)
V.
Illegal
activities (drugs)
VI.
Non-market
activities (volunteering, babysitting, tasks performing for yourself)
1/28/16
VII.
Transfer
payments(public and private)
-Public includes VA, welfare, Social
Security
-Private includes scholarships
What is Included in GDP
I.
C
(Personal consumptions expenditures), accounting for 65%
II.
IG
(gross private domestic investment)
(new
factory equipment)
(factory
equipment maintenance)
(construction
of housing), accounting for 17%
III.
G
(government spending), accounting for 20%
IV.
Xn
(net export) (calculation: exports-imports), accounting for -2%
1/29/16
Two ways to
calculate GDP (Expenditures and Income Approach)
-Expenditures
approach add up all the spending on final goods and serious produced in a given
year.
-Expenditures
Formula: C+IG+G+Xn (exports-imports)
-Income
approach- add up all the income that resulted from selling all final goods and
services produced in a given year
-Expenditures
Formula: GDP=W(wages)+R(rent)+I(interest)+P(profits)+
statistical adjustment
·
Statistical adjustment includes
I.
indirect business taxes
II. depreciation (consumption fixed capital)
III. net foreign faction payment
-Budget is government purchase of goods and services plus
government transfer payments minus government tax and fee collection
-If positive, it is a deficit
-If negative, it is a surplus
-Trade- exports minus imports
-If positive, it is a surplus
-If negative, it is a deficit
I. -Compensation of employees could include wages, salaries,
fringe plus
-benefits, social security contributions, health, and pension
play plus
-rent-income of property owner of the loan
-interest is the income of that is paid by someone to the
owner of the loan plus
-corporate profit that is the income of the stock holder in a
corporation
-proprietor’s income is income of a sole proprietor or a
partnership
II. National Income
-NI= GDP minus
indirect business taxes minus deprecation minus net foreign factor payment
-Disposable
personal income is the national income minus government transfer
payments minus personal household investment minus government transfer for
payments
2/1/16
NDP, NNP, Real GDP, Nominal GDP, GDP Deflator, and CPI
-NDP (Net domestic product)GDP minus depreciation
- Net national
product (NNP) Is GNP minus depreciation
-GNP is GDP
plus net foreign factor payment
-Nominal GDP is the value of output produced in the current
prices
-Can increase from year to year if either output or prices
increases
-Real GDP is the value of output produced in constant or base
year prices
-Is also adjusted for inflation
-Can increase from year to year only if output increases
Nominal/Real GDP Formula= (P)(Q)
If we want to economic growth, we use real GDP
If we want to measure inflation, we would use nominal GDP
|
|
Quantity in 2015
|
Quantity in 2016
|
Price in 2015
|
Price in 2016
|
|
Pizza
|
$5
|
$6
|
$10
|
$15
|
|
CD
|
$4
|
$5
|
$15
|
$20
|
|
Stereo
|
$2
|
$4
|
$600
|
$550
|
|
Automobiles
|
$1
|
$1
|
$10,000
|
$12,000
|
2015 Nominal GDP-$11,310 ($50+$60+$1,200+$10,000)
2015 Real GDP- $11,310
2016 Nominal GDP-$14,390 ($90+$100+$2,200+$12,000)
2016 Real GDP-$12,535
-GDP Deflator,
it is a price index used to adjust from nominal to real
-Formula: Nominal GDP
/ Real GDP x (100)
-In the base year the GDP deflator will always equal to one
hundred.
-Years after the base year, the GDP deflator is greater than
one for one hundred.
-For years before the base year, the GDP deflator is less
than one hundred.
-Consumer Price
Index (CPI) is the most commonly used measurement for inflation; it
measures the cost of a market of foods for a typical urban American family.
-Formula: cost of a market basket of goods in a given over
cost a market basket of goods in base year multiplied by one hundred
-Inflation: price
index in year two minus price index of year one
over the price index in year one
multiplied by one hundred
2/2/16
Real interest rate versus nominal Interest rate
-Anticipated inflation is expected.
-Fisher effect
-Nominal interest rate is equal to the expected interest rate
plus inflation premium
-Real interest rate is the percentage increase in purchasing
power, the borrower must pay the lender for a loan
-Is adjusted for inflation
-Unanticipated inflation is unexpected, increases in chart
-Formula: nominal interest rate minus inflation
Hurt by inflation
I.
Savers
II.
Creditors/lenders
III.
Those
who are on a fixed income (elderly, welfare, social security, retired)
Helped by inflation
I.
Debtors
(sole group helped by inflation)
C.OL.A. (cost of living adjustment)
giving automatic wage increases when inflation occurs (New York and California
has C.O.L.A.)
2/4/16
Unemployment
-Unemployment is the failure to use available resources particular labor to produce desired goods and services
-Underemployment is not when using talent, or having only
part time employment (under twelve hours)
-Labor force consist of those above 16 years old, able to
work
-Both the employment and unemployed falls in the labor force
Not in the Labor Force(8)
I.
Military
II.
Students
III.
Retired
People
IV.
Disabled
V.
Homeworkers
VI.
Metal
Institutions
VII.
Jail/Prison
VIII.
Those
who are not looking for a job
-Unemployment rate is 4 to 5% equals full employment; natural
rate of unemployment (NRU)
-less than 4% in the Utopia
-How to calculate the unemployment rate: number of
unemployment over the number of unemployed plus number of number of unemployed
(labor force) multiplied by 100
Types of Unemployment
I.
Frictional
unemployment- searching for a job, temporarily unemployed or in between jobs
-People
who fall into frictional unemployment have transferable skills
-Example:
better opportunity, or high school/college graduate
II.
Structural
employment- changes in the structure of the labor force, which makes some
skills and jobs obsolete
-They
don’t have transferable skills
-Example:
NASA Spaceship skills are non-transferable to car making
III.
Seasonal
unemployment- depends on time of year or nature of job
i.
School
bus drivers
ii.
Lifeguards
iii.
Santa
Claus/ Easter Bunny Impersonator
iv.
Contractor
(in pleasant weather only)
v.
Firework
sellers
IV.
Cyclical
unemployment results from economic downturns such as recession, as demands for
goods and services fall, demand for labor also falls and workers are laid off
Recession:
stores are closing; people getting laid off
-Anytime frictional and structural unemployment occurs equals
natural unemployment (NRU)
Full employment means there is no cyclical unemployment
2/5/16
GDP Gap, Okun’s Law, and Rule of 70
-GDP gap, it is the amount by which actual GDP falls short of
potential GDP
-Okun’s Law states for every 1% in which actually
unemployment rates exceed the NRU a GDP gap of about 2% exists
-Example: In 2012, the unemployment rate for Mexico was 7.4%
the NRU for Mexico is 6%
(1.4%) (2) =2.8% loss of potential GDP
-Rule of 70: is used to determine how many years it takes for
a value to double given a particular annual growth rate
-Example: 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?
Solution: 70 over 7%= 10 years
