Unit 2

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?!?