UNIT 2 NOTES

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