1-26-17
Circular Flow Model
- Household- A person/group that shares income
- Business/Firm- Organization that produces goods and serves for sale
- GDP
- G-Gross
- D-Domestic
- P-Product
- Total value of all final good and services produced with countries border in a given year
- includes all production or income earned within U.S. and foreign countries
- Excludes production outside of U.S. even by Americans
- GNP
- G-Gross
- N-National
- P-Production
- total value of all final goods services produced by the Americans in a given year
- includes production/income earned by Americans anywhere in the world
- excludes production by non-Americans even in the U.S.
- GDP
- Formula: C + IG + G + XN
- C- consumption (67%)
- IG- Gross private domestic investment (18%)
- factory equipment maintenance
- new factory equipment
- construction of housing
- Unsold inventory of product built in a year
- G- Government purchases (17%)
- XN- Net exports
- Formula: Exports - imports
- Include
- C
- IG
- G
- XN
- Exclude
- Intermediate goods
- goods to make final good
- avoid double or multiple
- Used or secondhand
- Stocks;bonds
- No production
- Unreported business activity(ex. Tips)
- Gifts and trans-fee payments
- things such as scholarships, social security , unemployment
- illegal activity
- Non market activity
- Income approval to GDP
- W + R + I + P +
- W-wages(compensation of employees/salaries)
- R-Rents(income received by households and business that supply property resources
- I- interest(money paid by private businesses for to supplier or loans used to purchase capital)
- P-Profits(When you own your own business)
- Formulas that you need to know
- Trade: Exports - imports
- Budget: Gov't purchases for goods and services + gov't transfer payments - gov't fee
- National income: compensation of employees + Rental Income + Interest Income + Proprietor's Income + Corporate Profits
- 2nd: GDP - indirect Business taxes - Depreciation - Net foreign factor payments
- Disposable personal income: National income - personal household taxes + gov't transfer payments
- Net National Product: GNP - Depreciation
- Net Domestic Product: GDP - Depreciation
- Depreciation
- loss in value in capital equipment due to normal wear and tear
- Gross investment formula: Net investment + Depreciation
- house is not consumption
- GNP formula: GDP + Net foreign factor payment
- another phrase for depreciation is consumption for fixed capital
2-3-17
Nominal GDP vs. Real GDP
- Nominal GDP
- value of output produced in current prices
- Formula : P X Q
- deduced from current year prices
- Value of output produced in constant based yr. prices
- Real GDP
- Formula: P X Q
- base yr. prices
- adjusted for inflation
- nominal can increases yr. to yr.
- Real GDP can increases yr. to yr. if only output increases
- base yr. nominal = GDP
- years after base yr., nominal > real GDP
- years before base year Real GDP> nominal GDP
- Base yr. is always the earlier year
- GDP Deflator
- Price index used to adjust from nominal to real
- Formula: (nominal GDP) / (Real GDP) X 100
- Base yr. GDP deflator will always = 100
- yrs. after base yr. GDP deflator will be greater than 100
- yrs. before base yr. GDP deflator will be less than 100
- Consumer Price Index (CPI)
- measures inflation by tracking changes in the price of market basket of goods
- Cars, trucks, etc.
- Formula: (price of market basket in current yr.) / (price of market basket in base yr.) X 100
- Inflation
- General rising level of prices
- reduces the purchasing power of money
- amount of goods and serves that money buys
- ideal inflation rate is 2-3%
- 3 causes of inflation
- Printing of money
- Demand pull inflation
- demand pulls up prices
- demand increases but supply stats the same
- overheated economy with excessive spending but same amount of good
- Cost push inflation
- higher production cost increase prices
- formula inflation: (current year price index - base yr. price index) / (base yr. price index) X 100
- deflation - decline in general price level
- disinflation - occurs when inflation rate itself declines
- rule of 70
- used to calculate # of yrs. it will take for price level to double at any given rate of inflation
- formula: 70 / (annual rate of inflation
- real interest rate - amount of # that is borrowed
- formula: real = nominal interest rate - expected inflation
- percentage increase in purchasing power that is borrower pays to the lender
- Nominal interest rate - percentage increase in money that the borrowers pay back to the lender not adjusting for inflation
- Hurt inflation
- lenders people who lend money ( at fixed interest rates)
- people with fixed income
- savers
- Helped by inflation
- borrowers- people who borrow money
- a business where the price of the product increases faster than the price of resources
2-9-17
Unemployment
- Percent of people in labor force that want a job but not working
- Labor force
- consist of unemployed and employed
- if you work at least 1 hour a month than you are employed
- part time workers
- Not in labor force
- kids
- full time students
- people in mental institution
- incarcerated- jail and prison
- retirees
- suesy home makers- people who stay home
- military person
- discouraged
- when you are over 24 you are considered part of the work force
- unemployment= (unemployed + employed)
- also: (number employed) / (number in labor force) X 100
- 4 types of unemployment
- standard #4-5%
- 1. frictional unemployment1%
- temporarily employed / being between jobs
- individual qualified workers with transferable skills but are not working
- ex: high school and college graduates looking for jobs
- 2. seasonal unemployment
- specific type of frictional unemployment which due to tome of yr. and nature of the job
- these jobs will come back
- 3. structural unemployment
- changes in structures of labor force make some skill jobs obsolete
- workers DO NOT have transferable skill and jobs will never come back
- workers must learn new skill to result new jobs
- permanent loss of jobs is call creative destruction
- 4. Cyclical unemployment
- unemployment results from econ. down turns ( recession)
- as demand for goods and services fall, demand for labor falls and workers are fired
- Natural rate and full employment
- 2 of 3 types of unemployment are unavoidable
- frictional unemployment
- structural employment
- together make up natural rate of unemployment
- formula: Frictional; + Structural = full employment to NRU (4 to 5%)
- Full employment = no cyclical employment
- Okuns law: when unemployment rises 1% above natural rate , GDP falls by about 2%
WOW! LAST MINUTE STUDYING AGAIN?!?
