UNIT 2 Notes - February 5th, 2016

GDP Gap: The amount by which actual GDP falls short of potential GDP

Okun’s Law: For every 1% that the actual unemployment rate exceeds the natural rate of unemployment, a GDP Gap of about 2% occurs.

EX: In 2012, the unemployment rate for Mexico was 7.4%. The NRU is 6%. Find the GDP Gap.

7.4% - 6% = 1.4%

1.4% X 2% = 2.8% GDP Gap

Rule of 70: Used to determine how many years it will take for a value to double give a particular annual growth rate.

EX: 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?

70 (Rule of 70) / 7% (Interest Rate) = 10 Years

UNIT 2 Notes - February 4th, 2016

Unemployment: Failure to use available resources, particularly labor, to produce desired goods and services.

Labor Force: Anybody above 16 Years of Age, able and willing to work. (Employed/Unemployed)

Not in Labor Force:

·         Military

·         Homemakers

·         Retirees

·         Disabled

·         Mental Instituters

·         Criminals

·         Students

·         Those not looking for work

Unemployment Rate: Ideal 4% - 5% ; Full Employment/Natural Rate of Unemployment (NRU)

(Number of Unemployed / Labor Force (# of employed + # of unemployed)) X 100

Types of Unemployment

·         Frictional: People who are looking for a job, temporarily unemployed, or is in-between jobs. Individuals with transferrable skills. EX: High school/college graduates looking for a job or individuals who leave their job in hope of finding a better one.

·         Structural: Changes in the structure of the labor force make some skills obsolete. These workers do not have transferable skills.

·         Seasonal: It is due to the time of the year and nature of the job. EX: School bus drivers, Santa/Easter Bunny impersonators, Lifeguards, Construction workers.

·         Cyclical: Unemployment that results from economic downturns such as a recession. As demands for goods & services fall, demand for labor falls, and workers are laid off. EX: Closings of Macy’s or Walmart.

Two of the Four unemployment types are unavoidable; Frictional and Structural = NRU

Full Employment means no Cyclical Unemployment. 

UNIT 2 Notes - February 3rd, 2016

Real Interest Rate VS Nominal Interest Rate

·         Nominal Interest Rate: Not adjusted for inflation. The Percentage increase in money you pay the lender for the use of money that you borrowed.

NIR = RIR + Inflation Premium

·         Real Interest Rate: Adjusted for Inflation. The percentage increase in the purchasing power the lender receives when the borrower repays the loan with interest (Unanticipated Inflation)

RIR = NIR – Inflation

Unanticipated Inflation

·         Hurt by Inflation:

o   Savers

o   Lenders/Creditors

o   Those who are on a fixed income (Elderly, Welfare, Pension)

·         Helped by Inflation:

o   Debtors

C.O.L.A. (Cost of Living Adjustment): Automatic wage increases when inflation occurs.

UNIT 2 Notes - February 2nd, 2016

Nominal GDP: The Value of output produced in CURRENT prices (Output = Quantity/Production)

CURRENT Quantity X CURRENT Price

Real GDP: The Value of output produced in constant, base year prices. (Adjusted for Inflation)

CURRENT Quantity X BASE YEAR Price

·         If you wanted to measure economics growth, you would use Real GDP

·         If you wanted to measure price increases (Inflation), you would use Nominal GDP

·         In the base year, Nominal GDP = Real GDP

·         In years after the base year, Nominal GDP will exceed Real GDP

·         In years before the base year, Real GDP will exceed Nominal GDP

	Q in 2015	Q in 2016	P in 2015	P in 2016
Pizzas	5	6	$10	$15
CDs	4	5	$15	$20
Stereos	2	4	$600	$550
Automobiles	1	1	$10,000	$12,000

Real GDP in 2015 = (5x10) + (4x15) + (2x600) + (1x10,000) = $11,310

Real GDP in 2016 = (6x10) + (5x15) + (4x600) + (1x10,000) = $12,535

Nominal GDP in 2015 = (5x10) + (4x15) + (2x600) + (1x10,000) = $11,130

Nominal GDP in 2016 = (6x50) + (5x20) + (4x550) + (1x12,000) = $14,390

GDP Deflator: A price index used to adjust from Nominal to Real GDP

(Nominal GDP / Real GDP) X 100

·         In the base year, the GDP Deflator = 100

·         For years after the base year, the GDP Deflator > 100

·         For years before the base year, the GDP Deflator < 100

Consumer Price Index: It is the most commonly used measurement of inflation. It measures the cost of a market basket of goods for a typical urban American family.

(Cost of a market basket of goods in a given year / cost of a market basket of goods in the base year) X 100

Inflation:

[(Price Index in Year Two (current year/new year) – Price Index in Year One) / (Price Index in Year One)] X 100

UNIT 2 Notes - February 1st, 2016

2 Ways to Calculate GDP

·         Income Approach: Add up all of the income that resulted from selling all final goods and services produced in a given year (Not really used; People can lie about income)

Wages (w) + Rents (r) + Interest (i) + Profits (p) + Statistical Adjustments

·         Expenditure Approach: Add up all of the spending on final goods and services produced in a given year. (Same results as Income Approach) (Show Receipts)

GDP = Consumption (c) + Gross Private Domestic Investment (Ig) + Government Spending (g) + Net Exports (Xn)

Compensation of Employees: Wages and Salaries, Wage and Salary Supplements such as pensions, health insurance, and welfare.

Rents: Income received by the households and businesses that supply property resources (tenant to landlord, monthly payments)

Interest: Money paid to suppliers of loans (Unless paid in full, owe interest)

Proprietors Income: This comes from “soul proprietors” (Owning your own business/Entrepreneurship) and partnerships.

Corporate Profits: Could include dividends, corporate income taxes, and undistributed corporate profits

Statistical Adjustments: Would be indirect business taxes, consumption of fixed capital (Depreciation), and net foreign factor payment.

Budget = Gov’t Purchases of Goods & Services + Gov’t Transfer Payments – Gov’t tax & Fee Collections

·         Positive Budget = Deficit

·         Negative Budget = Surplus

Trade = Exports – Imports

·         Positive Trade = Surplus

·         Negative Trade = Defecit

National Income = Compensation of Employees + Rents + Interest Income + Proprietors Income + Corporate Profits

National Income = GDP – Indirect Business Taxes – Depreciation – Net Foreign Factor Payment

Disposable Personal Income = National Income – Personal Household Taxes + Gov’t Transfer Payments

Net Domestic Product (NDP) = GDP – Depreciation

Gross National Product (GNP) = GDP + Net Foreign Factor Payment

Net National Product (NNP) = GNP – Depreciation

UNIT 2 Notes - January 28th, 2016

Gross Domestic Product (GDP): The total market value of all the final goods and services that are produced within a countries borders in a given year.

Gross National Product (GNP): The total market value of all final goods and services by citizens of that country on its land or foreign land.

Included in GDP

·         C: Personal Consumption Expenditures (65% of what we spend)

·         IG: Gross Private Domestic Investment (17% of what we spend)

o   New Factory Equipment

o   Factory Equipment Maintenance

o   Construction of housing

o   Unsold inventory of products built in a year

·         G: Government Spending (20% of what we spend)

o   School busses, teachers, salaries, ditches, etc.

·         Xn: Net Exports (Exports minus Imorts ) (-2% of what we spend) (More Imports than Exports)

Not Included in GDP

·         Intermediate Goods: Goods that require further processing before they are ready for final use

·         Used/Second-Hand Goods: Trying to avoid “double counting”

·         Purely Financial Transactions: Stocks & Bonds

·         Illegal Activities: Drugs

·         Unreported Business Activities: Unreported Tips

·         Transfer Payments:

o   Public- Social Security, Veterans, Welfare

o   Private- Scholarships

·         Non-Market Activity:

o   Volunteering

o   Babysitting

o   Any work performed for yourself

UNIT 2 Notes - January 27th, 2016

Circular Flow Diagram: It represents the transactions in an economy

Product Market: The place where goods and services are produced by businesses [Goods & Services]

Factor Market: The place where households sell resources and businesses buy resources.

Firms: Organizations that produce goods and services for sale.

Households: A person or group of people that share their income.