Unite 2 Notes

                                                                           GDP

1. Domestic Value (GDP): The total dollar value of all goods and services produced within a country's border within a given year.
2. Gross National Product (GNP): The total value of all final goods and services produced by Americans within a year.
• An American making a product in Bangladesh will go to our GDP and Bangladesh's GNP.

        What is included in GDP? 

          C + Ig + G + Xn = GDP

• C- Consumption: 67% of economy spent; has to be a final good or service
• Ig- Gross Domestic Private Investment: factory equipment maintenance, new factory equipment, construction of housing, unsold inventory, and products built in a year.
• G- Government spending
• Xn- net export: Export-Import

        What is excluded in GDP?

• Non-market activities: Volunteering, family work, illegal drug dealing
• Intermediate goods: Goods and Services purchased for resale or for further processing or manufacturing
• Not counted to avoid multiple or double counting
• Used or second hand goods: Counted first year purchased
• Financial Transaction
• Stocks
• Bonds
• Real estate
• Gifts or Transfer Payments
• Public: Recipient contributes nothing to current production
• Ex. Welfare pay, Social Security Numbers
• Private: Produce no output; transfer fund from one individual to another
• Ex. Scholarship

1. Expenditure approach: Sum of all domestic expenditures made on a final good
• C + Ig + G + Xn = GDP
2. Income approach: Add up all income earned by households and firms in a single year
• W + R + I + P + Statistical Adjustments = GDP
• W: wages
• R: rent
• I: interest
• P: profit (proprietor's income)

HELPFUL FORMULAS: 

1. Budget: Gov. purchases of goods & services + Gov. transfer payments - Gov. tax & free collection
• If the total is positive(+), it is a deficit
• If the total is negative (-), it is a surplus
2. Trade: export - import
3. GNP: GDP + net foreign factor payment
4. NNP (net national product): GNP - depreciation
5. NDP (net domestic product): GDP - depreciation
6. National income: GDP - indirect business taxes - depreciation - net foreign factor payment
• OR compensation of employees + rental income + interest income + proprietor's income + corporate profits
7. Disposal personal income: National income - personal household taxes + Gov. transfer payment
8. Ig (Gross Domestic Private Investment): net domestic investment - consumption of fixed capital (depreciation)

NGDP and RGDP

1. Nominal GDP (NGDP): Value of output produced in current prices
• Price x Quantity
• Can increases year to year if either output or prices increase.
2. Real GDP (RGDP): Value of output produced in constant or base year prices
• Base Price (earliest year) x Quantity
• Can increase year to year only if output increases
3. Output is measured by Quantity
4. Adjust for Inflation, take in base year prices

Price index and Inflation

The Price index measures inflation by tracking changes in price of a market basket of goods compared with a base year

• Price Index
• Price of market basket in current year   x 100
•             Price of market basket in base year   

• GDP Deflator
• Price index used to adjust from nominal GDP to real GDP
• In base year, GDP is 100, after base year GDP is greater than 100
• Years before base year, GDP deflator is less than 100
• Calculate with the following formula
• Nominal GDP  x 100
•  Real GDP
• How to calculate Inflation
•  New GDP deflator - Old GDP deflator   x 100
•                     Old GDP deflator

1. Inflation: Rise in general prices. 
• Standard  rate 2% - 3%
• Inflation rate: Measure the percentage increase in the price level overtime.

• Key indicator of economy's wealth.
• Deflation: decline in general price level.
• Disinflation: occurs when deflation rate itself declines.  
• Consumer price index (CPI): measures inflation by tracking yearly prices of a fixed basket of Consumer goods and services. in addition, CPI changes in cost of living and price level.

       How to solve Inflation

1. Finding inflation rate using market basket data
•  current year market basket value - base year market basket value  x 100
2.                       base year market basket value 
3. Finding inflation rate using price index:
• current year price index - base year price index   x 100
•  base year price index
4. Estimate inflation using rule of 70
• Used to calculate the number of years it will take for the price level to double at any given rate of inflation.
• Years needed to double inflation = 70/Annual inflation rate
5. Determine Real Wages
• Real Wages: Nominal Wages/Price level  x 100
6. Finding Real interest rate
• Nominal interest rate - Inflation premium
• Cost of borrowing or lending money that is adjusted for inflation
• Always expressed as a percentage
7. Nominal interest rate
• Unadjusted cost of borrowing or lending money

      Causes of Inflation

• Demand Pull Inflation
• Caused by and excess of demand over output that pulls prices upward
• Cost Push Inflation
•  Caused by a rise in per unit production cost due to increasing resource cost

     Effects of Inflation

• Anticipated Inflation
• It was expected it to happen
• COLA added to pay, wages are adjusted
• Unanticipated Inflation
• What happens is unexpected
• One morning, almost all workers in a factory are fired

Who does it hurt and who does it help?

1. Helps
• Borrowers: Their debt will be repayed with cheaper dollars than what was loaned out
• Fixed Contract
2. Hurts
• Fixed income
• Retirement, Social security
• Savers
• Lenders/creditors

Unemployment

• Percentage of people who do not have jobs but are in the labor force
• The labor force is the number of people in a country that are classified as either employed or unemployed
• # of Unemployed                             x 100
• # of unemployed + # of employed
• Those not in the labor force include
• Kids
• Military Personnel
• Mentally insane
• Incarcerated
• Retired folks
• Stay at home parents
• Full time students
• Discouraged Workers
• Full employment: Occurs when no cyclical unemployment is present in the economy
• "Natural Rate of employment" - known as NRU
• 4-5%  is the desired goal
• Why is unemployment good?
• Less pressure to raise wages
• More workers available for future expansions
• Why is unemployment bad?
• Not enough consumption
• Too much poverty
• Too much Government assistance needed
• Okun's Law:
• for every 1% of unemployment above the NRU, it causes a 2% decline in real GDP.

Employment Statistics

1. Frictional unemployment
• People between jobs
• Choosing new opportunities, lifestyles and new education
2. Seasonal unemployment
• Waiting for the right season to conduct your trade
• Ex. Bus driver, Life guard, Construction worker
3. Cyclical unemployment
• Down turns in business cycle, bad for society and the individual if recession or trough.
4. Structural unemployment
• Lack of Skills, a decline in the industry or technology changes
• Ex. Type writer in computer age

Circular flow model

• Represents transactions in an economy
• Goods and services flow clockwise

2 markets

• Resource/Factor: Place where households sell resources and buisnesses buy resources
• Product market: Place where goods and services ate produced and bought abd sold to households

3 actors in the  economy

1. Households 

2. Government 

3. Firm

Market economy is a free market