Unit 2 Macroeconomics

January 27, 2015

GDP: Gross Domestic Product: Total dollar value of all goods and services produced within a country's borders within a year. 

GNP: Gross National Product: The total value of all final goods and services produced by Americans for a given year. 

- United States working in other counties

- Working in other places for the U.S.

Included in GDP: 

C+Ig+G+Xn = GDP

C: Consumption: 67% of the economy. Has to be final good or service. Has to be money spent. 

Ig: Gross Domestic Investment: 

1. Factory equipment maintenance 

2. New factory equipment 

3. Construction of housing 

4. Unsold inventory of products built in that year. 

Ex: Purchasing a house built in 2014- applied to 2014 GDP

Net Investment + Depreciation =IG

G: Government spending:

-Military buys weapons

-FDISD hires teachers  

Xn: Net exports: (exports- imports) 

Not included in GDP:

1. Non- Market Activities: volunteering, family work, illegal drugs, babysitting 

2. Intermediate goods: Goods and services that are purchased for resale, or for further processing and manufacturing 

- to avoid double counting 

- they are things that go into buying a finished product

3. Used or secondhand goods: counted 1st year purchased

4. Financial transactions: 3 groups 

-Stocks 

-Bonds 

-Real Estate 

5. Gifts or transferred payments (public and private) 

Private: Produce no output, simply transfer funds from one private individual to another- Scholarship 

Public: Recipients contribute nothing to the current production- Social security; welfare payments 

January 28, 2015 

Expenditure Approach 

C+Ig+G+Xn = GDP: most popular 

Income Approach

- Add all income earned by households and firms in a single year 

GDP= W+R+I+P+Statistical Adjustments 

W: Wages 

R: Rents 

I: Interests 

P: Profit (proprietors income ) 

Budget 

Government Purchases of Goods & Services + Government Transfer Payments - Government tax and fee collections 

If

 += deficit

-= surplus 

Trade 

Exports- Imports 

GNP: GDP + Net Foreign Factor Payment 

NNP: 

Net National Product 

GNP- Depreciation 

NDP: 

Net Domestic Product 

GDP- Depreciation 

National Income: 

*GDP- Indirect Business Taxes - Depreciation - Net Foreign Factor Payment 

*Compensation of Employees+ Rental Income + Interest Income + Proprietors Income + Corporate Profits 

Disposable Personal Income 

National Income - Personal House and Taxes + Government Transfer Payments 

January 29, 2015

Real and Nominal GDP

Nominal GDP: The value of output produced in current prices 

Price x Quantity 

- it can increase from year to year, if either output or price increase 

Real GDP: The value of output produced in constant or base year prices (could be earliest year)

Base Price x Quantity 

- it can increase from year to ear  ONLY if the output increases. 

-output is measured by quantity 

- real GDP only uses base year because it is adjusted for inflation and base prices are the same. 

Price Index

- it measures inflation by tracking changes in the price of a market basket of goods compared with the base year 

Same year (QuantityxProducts) added together = Market Basket of Goods 

Price of MBG Current year/ Price of MBG Base year X 100 = Price Index

GDP Deflator

- A price index used to adjust from nominal to real GDP. 

- IN the base year, GDP Deflator =100 

- AFTER base year, GDP Deflator is GREATER than 100

- Before base year, GDP Deflator is LESS than 100

GDP Deflator= Nominal GDP/ Real GDP X 100

Inflation

= New GDP Deflator - Old GDP Deflator / Old GDP Deflator x 100

Inflation: A rise in the general level of prices 

- standard: 2-3%

A. 

Inflation rate: measures percentage increase in the price level over time. A key indicator of the economy's health. 

-Deflation: A decline in the general price level. 

-Disinflation: Occurs when the inflation rate itself declines. 

B. 

CPI( Consumer price index): 

Measures inflation by tracking the yearly price of a fixed basket of consumer goods and services. In addition, CPI indicates changes in the cost of living and price level. 

5 ways to solve inflation problems: 

1. Finding inflation rate using market basket data. 

Current year market basket value- Base year market basket value/

Base year market basket value

2. Finding inflation rate using price index

Current year price index- base year price index/ base year price index x100

3. Finding inflation using the rule of 70

The rule of 70: used to calculate number 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

4. Determining real wages 

Real wages= nominal interest rate- inflation premium 

• real interest rate: the cost of borrowing or lending money adjust for expected inflation rate (%)

• nominal interest rate: the unadjusted cost of borrowing or lending money 

Causes of inflation 

·         Demand and pull inflation: Caused by an excess of (demand /output) that pulls prices outward

·         Cost-push inflation: Caused by a rise in (Per unit production cost) due to (increase in resource cost)

Effects of inflation

Anticipated: Expected- COLA added to pay/ wages adjusted

Unanticipated: Unexpected

Hurt by inflation:  

·         COLA: Fixed income (received from the government)

·         Savers

·         Lenders/ Creditors

Help by inflation

·         Borrowers: Debt repaid with cheaper dollars than which was loaned out

·         Fixed Contract

February 3, 2015

Frictional Unemployment: People between jobs- Choosing new opportunities, lifestyle, choices, new education level.

(Seasonal Unemployment): Waiting for the right season to conduct your trade. Mall: Holidays, construction, lifeguarding, bus drivers.

Cyclical Unemployment: Down turns in the business cycle. Bad for society as well as individuals: Recession; Trough

Structural Unemployment: A lack of skills, a decline in an industry, technology changes; Factory moved, no skill for new technology, don’t know how to read/write

Unemployment: The percentage of people who do not have a job, but they are in the labor force.

Labor Force: Number of people in a country that are classified as either employed of unemployed.

Unemployment Rate:

#of Unemployed/ # of Unemployed + # of Employed x 100

Not in labor force:

1. Kids

2. Retired People

3. Military Personnel

4. Mentally Insane

5. Incarcerated

6. Stay at Home Parents

7. Full-Time Students

8. Discouraged Workers- Leave the workforce; applied/ never got job

Full employment:

Occurs when there is no cyclical unemployment present in the economy.

SO, full employment IS the natural rate of unemployment: NRU:

Standard Percentage: 4-5%

Why is unemployment good?

1. Less pressure to raise wages

2. More workers are available for future expansions

Why is unemployment bad?

1. Not enough consumption (GDP)

2. Too much poverty

3. Too much government assistance needed

Okun’s law:

For every 1% of unemployment above the NRU (Natural Rate of Unemployment) causes a 2% decline in real GDP.

If NRU= 3.5

7%= GDP GONE