Notes (2/3/15)- Unemployment

Unemployment: percentage of people who do not have jobs but are in the labor force

• Labor Force
• number of people in a country that are classified as either employed or unemployed
• Unemployment rate: # of unemployed / # of unemployed + # employed * 100
• Not In Labor Force
1. Kids
2. Retired people
3. Military personal
4. Mentally insane
5. Incarcerated
6. Stay at home parents
7. Full time students
8. Discouraged workers
• Full Employment
• occurs when there is no cyclical unemployment present in the economy
• natural rate of unemployment (NRU): another name for full employment
• 4% to 5%
• Why is unemployment good?
1. because there is less pressure to raise wages
2. more workers are available for future expansions
• Why is unemployment bad?
1. not enough consumption
2. too much poverty
3. too much government assistance needed
• Okun's Law
• for every 1% of unemployment above the NRU causes a 2% decline in real GDP 

Notes (2/2/15)- Inflation

• I. Inflation: rise in general level of prices
• standard rate is 2%-3%
• II. Measuring Inflation
• a. Inflation rate: measures the % increase in the price level over time; key indicator of the economy's health
• i. deflation: decline in general price level
• ii. disinflation: when the inflation rate itself declines
• b. Consumer Price Index (CPI): measures inflation buy tracking the yearly price of a fixed basket of consumer goods & services; in addition, indicates changes in cost of living and price level
• III. Solving Inflation Problems
• a. Finding inflation rate using market basket data
• current year market basket value - base year market basket value / base year market basket value * 100
• b. Finding inflation rate using price indexes
• current year price index - base year price index / base year price index * 100
• c. Estimating inflation using the Rule of 70
• used to calculate # of years it will take the price level to double at any given rate of inflation
• years needed to double inflation = 70 / annual inflation rate
• d. Determining real wages
• real wages = nominal wages / price level * 100
• e. Finding real interest rates
• real interest rate = nominal interest - inflation premium 
• i. Real interest rate: cost of borrowing and lending adjusted for expected in inflation rate
• Nominal interest rate: unadjusted cost of borrowing or lending money
• IV. Cause of Inflation
• a.Demand-pull inflation: cause by an excess of demand over output that pulls prices upward
• Cost-pull inflation: caused by a rise in per unit production cost due to increasing resource cost
• V. Effects of Inflation
• Anticipated: anticipated inflation
• Unanticipated inflation: not expecting inflation

Notes (1/27/15)- GDP/GNP

• GDP- total dollar value of all goods & services produced within a country's borders within a given year
• GNP- total value of all final goods and services produced by Americans in a year

• Included in GDP:
• C+Ig+G+Xn
• C:consumption
• 67% of economy
• has to be final good or service
• Ig: gross private domestic investment
• factory equipment maintenance
• new factory equipment
• construction of housing
• unsold inventories of products built in a year
• G: government spending
• military spending
• education
• Xn: net exports
• exports-imports
• Excluded from GDP:
• (1) Non-market activities
• volunteering
• family work
• illegal drugs
• (2) Intermediate goods
• goods/services that are purchased for resale or for further processing
• trying to avoid double or multiple counting
• things that go into making something
• (3) Used or second-hand goods
• not counted because it was counted the first time purchased
• (4) Financial transactions
• stocks, bonds, and real estate
• (5) Gifts or transferred payment
• private transfer payments produce no output
• public transfer payments recipients contribute nothing to the current production

Calculating Cost of GDP:

• Expenditure approach
• C+Ig+G+Xn=GDp
• Income approach- add up all the income earned by households and firms in a single year
• Wages+Rent+Interest+Profit+Statistical Adjustments

Budget Formula: government purchases of goods & services + government transfer payments - government tax and fee collections

                   -if # is positive = deficit

                   -if # is negative = surplus

Trade Formula: exports - imports

GNP Formula: GDP + net foreign factor payment

NNP Formula: GNP - depreciation

NDP Formula: GNP - depreciation  

National Income Formula: (1) GDP - indirect business taxes - depreciation - net foreign factor payments (2) compensation of employees + rental income + interest income + proprietors income + corporate profits

Disposable Personal Income Formula: national income - personal household taxes + government transfer payments

Nominal GDP: the value of output produced in current prices

          -price * quantity

          -an increase from year to year if either output or price increases

Real GDP: the value of output produced in constant or base year prices

          -price * quantity 

          -can increase from year to year only if output increases (output measured by quantity)

          -real GDP only reflects base year prices because of inflation

Price Index

• measures inflation by tracking changes in the price of a market basket of goods compared to the base year
• price of market basket of goods in current year / price of market basket of goods in base year * 100

GDP Deflator

• price index used to adjust from nominal to real GDP
• in base year, GDP deflator will equal 100                                                                        
• for years after base year, GDP deflator is greater than 100
• for years before base year, GDP deflator is less than 100
• Nominal GDP / Real GDP * 100

Calculating Inflation

• new GDP deflator-old GDP delfator / old GDP deflator * 100 

Circular Flow Model Notes (1/23/15)- Market Economy 

• Resource (Factor) Market- land, labor, entrepreneurship
• firms buy
• households sell
• Product Market- product, service
• firms sell
• households buy
• Government 
• both a consumer & producer in both markets

Example of a market economy: