UNIT 2:

UNIT 2: Circular Flow, GDP, Real GDP, Nominal GDP, Employment, Unemployment, Natural Rate of Unemployment , Inflation Types, CPI and Inflation over time, The GDP Deflator and it uses

January 27, 2016 

UNIT 2: Circular Flow

Circular Flow Diagram:

• It represents the transactions in a economy. 

Product Market: 

• The place where goods and services are produced by businesses. 

Factor Market: 

• The place where households sell resources and businesses buy resources. 

Firms:

• An organization that produces goods and services for sale. 

Household:

• A person or a group of people that share their income.
• They sell the factors of production (land, labor, capital (physical & human), entrepreneurship) to businesses. 

January 28, 2016

UNIT 2: GDP, Real GDP, and Nominal GDP

Gross Domestic Product (GDP): 

• The total market value of all final goods and services that is produced withing a country's borders in  a given year. 
• Every country has its own GDP.

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.
• Every country has its own GNP.

Included in GDP:

 C - Personal Consumption Expenditure   (65%)

 Ig - Gross Private Domestic Investment   (17%)

1. New factory equipment
2. Factor equipment maintenance
3. Construction of housing
4. Unsold inventory of products built in a year

 G - Government Spending                        (20%)

Xn - Net Exports                                         (-2%)

• (Exports - Imports)  

What's NOT included in GDP:

1.) Intermediate goods

• Goods that require further processing before they are ready for final use. 

2.) Used / secondhand goods

• Trying to avoid double goods

3.) Purely financial transactions (stocks : bonds)

• It fluctuates, it could crash, it doesn't involve a good or service; not durable. 

4.) Illegal activities (drugs)

• EX: Selling drugs

5.) Unreported business activity 

• EX: Unreported tips

6.) Transfer payments

1. Public: (Social Security, welfare, etc.)
2. Private: (Scholarships) 

7.) Non-market activities

1. Volunteering
2. Baby-sitting
3. Any work that you perform for yourself 

February 1, 2016

UNIT 2: Calculating the GDP: Expenditures and Income Approach 

2 Ways To Calculate GDP:

1.) Income Approach

• Add up all the income that resulted from selling all final goods and services produced in a given year.
• Not used so much (people lie about their income)
• Formula: GDP= w + r + i + p + statistical adjustments 

2.) Expenditure Approach 

• Add up all the spending on final goods and services produced in a given year.
• Formula: GDP= C + Ig + G + Xn

Compensation of Employees: 

• Wages and salaries
• Wages and salary supplements (Pensions, health insurance, welfare)

Rents:

• Income received by the households and businesses that supply property resources
• Ex: Tenant to landlords (monthly payments) 

Interests:

• Money paid to suppliers of loans

Proprietors Income:

• Comes sole proprietors and partnerships
• Sole Proprietors: you own your business (entrepreneurs)

Corporate Profits:

• Could include dividends, corporate income taxes, undistributed corporate profits

Statistical Adjustments:

• Indirect business taxes
• Consumption of fixed capital (depreciation)
• Net foreign factor payment

Budget:

• Formula: Government purchases of goods & services + Government transfer payments - Government tax and fee collections 
• + : deficit
• - : surplus

Trade:

• Formula: exports - imports 
• + : surplus
  - : deficit 

National Income: 

• Formula: 
•  1.) Compensation of employees +        rent + interests income + proprietors income + corporate profits
•  2.) GDP - interest business taxes - depreciation - net foreign factor payments 

Disposable Personal Income:

• Formula: National income - personal household taxes + government transfer payments 

Net Domestic Product (NDP):

• Formula: GDP - depreciation

Net National Product (NNP):

• Formula: GNP -  depreciation

- GNP = GDP + net foreign factor payment

February 2, 2016

Nominal GDP:

• It is the value of output produced in current year prices
• Formula: Output= Quantity

Real GDP:

• It is the value of output produced in constant base year prices
• Adjusted for inflation
• Real GDP can increase from year to year only if quantity increases (used for economic growth)
• Formula: Price × Quantity 

• If you wanted to measure economic growth, use real GDP.
• If you wanted to measure inflation, use nominal GDP.
• In the base years: 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.

GDP Deflator:

• Price index used to adjust from nominal to real GDP
• Formula: 

• In the base year, the GDP deflator equals 100
• For years after the base year, the GDP deflator is greater than 100. 
• For years before the base years, the GDP deflator is less than 100. 

Consumer Price Index (CPI):

• The most commonly used measurement of inflation.
• It measure the cost of a market basket of goods fro a typrical urban American fmaily.
• Formula: 

Inflation:

• Formula: 

February 3, 2016

Nominal Interest Rate:

• It is NOT adjusted for inflation but your real interest rate is (anticipated).
• Percentage increase in money you pay the lender for the use of money that you borrowed.
• Formula:   Real rate of interest + inflation premium

Real Interest Rate:

• It is adjusted for inflation (unanticipated)
• It is percentage increase in purchasing power the lender receives when the borrower pays the loan with interest
• Formula:   Nominal interest rate - inflation = real interest rate

Unanticipated Inflation:

Cost of Living Adjustments (COLA):

• Automatic wage increases when inflation occurs. 

February 4, 2016

Unemployment:

• It is failure to use available resources particularly labor to produce desired goods and services.
• Not having a job/working (obviously)

Labor force:

• Anybody above 16 years of age
• Able of willing to work
• Employed + Unemployed 

Not in the Labor force:

1. People in the military
2. Homemakers
3. Retired people
4. Students (even if they work)
5. Disabled people
6. People in metal institutions 
7. People in jail/ prison
8. Those who are not looking for work 

Unemployed Rate:

• 4% to 5 = Full employment or Natural Rate of Unemployed (NRU)

How to calculate the Unemployment Rate:

Formula: 

Transferable Skills:
A person who has a skill set but bad experience. 

Types of Unemployment:

Frictional: 

• People who are looking for a job 
• Temporarily unemployed or between jobs
• Individuals with transferable skills
• Ex: High school or college graduates looking for  job
• Ex: Individuals who leave their jobs in hope of finding better

Structural: 

• Changes in the structure of the labor force makes some skills obsolete.
• These workers DO NOT have transferable skills
• Have to learn new skills to get job
• Ex: Space people after Obama closes down the space program -> Have to learn new skills to get another different job.
• Ex: VCR's

Seasonal:  

• Due to the time of the year and the nature of the job.
• Ex: School-bus drivers - only work when school is in
• Ex: Santa Clauses impersonators - only work during Christmas time
• Ex: Lifeguards - only work in the summers
• Ex: Construction workers - only work when there isn't any acclimate weather. 

Cyclical:

• Unemployment that results from economics downturns, such as a recession.
• As demand for goods and services falls, demand for labor falls and workers are laid off. 
• Ex: Closing of Macy's and Wal-Marts
• Ex: Recession: Oil industry 

• Full employment means no cyclical unemployment
• 2 of the 4 Types of Unemployment are unavoidable: Structural & Frictional = (NRU)

February 5, 2016

GDP Gap: 

• It is the amount by which actual GDP falls short of potential GDP.

Okun's Law:

• For every 1% in which the actual unemployment rate exceeds the natural rate of unemployed.
• GDP gap of about 2% occurs
• Ex: In 2011, the unemployment rate for Mexico is 7.4%. The NRU is 6%. 

7.4 - 6 = 1.4 

1.4 × 2= 2.8%

Gap: 2.8%

The Rule of 70:

• It is used to determine how many years it will take for a value to double given 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?
• Formula:   70 ÷ interest rate 
• 70 ÷ 7 = 10 years 

UNIT 1:

Unit 1: Scarcity, Factors of Production, Production Possibilities Graphs, Supply and Demand, Business Cycle 

January 5, 2016

Unit #1 – Introduction to Economics

Economics:

• The study of how society manages its scarce resources.
• All about science

Macroeconomics:

1. Money
2. Trade
3. Budget

• Ex: International trade, supply: demand, minimum wage 

Microeconomics:

• The study of the economy as a whole or of individual or specific units of the economy.
• Ex: Market, Business organization

Positive Economics: (Fact)

• Attempt to describe the world as it is
• Very descriptive
• Collects + present facts

Normative Economics: (Opinion)

• Attempts to prescribe how the world should be
• “ought to be”
• “should be”
• Ex: Government should raise minimum wage

Needs:

• Basic requirements for survival.

1. Food
2. Water
3. Shelter
4. Clothing

Wants:

• Desires of citizens.

Goods:

• Tangible Commodities

     Capital Good: Items used in the creation of other goods

         Ex: Trucks, Machinery, Factories

     Consumer Good: Goods that are intended for final use by the consumer

Services:

• Work that is performed for someone
• Ex: Concerts, barbershop

Scarcity:

• The most fundamental economic problems that society faces.
• How to satisfy unlimited wants with limited resources
• Ex: Oil

Shortage:

• Quantity demanded is greater than quantity supplied.

January 6, 2016

Unit #1 – Production Possibility Graph

Factors of Production:

• Resources required to produce goods and services.

1. Land
2. Labor
3. Capital     Physical Capital: Tools, factories, machines. Human Capital: Skills, abilities, knowledge, talents
4. Entrepreneurship: Innovative, risk-taker  Human Capital: Skills, abilities, knowledge, talents

Tradeoffs:

• Alternatives that we give up whenever we choose over another.

Opportunity Cost:

• The next best alternative.
• The money, time, resources a person gives up to make a final decision.
• Ex: Cranberry juice -> Orange juice -> water

Production Possibility Curve    (PPC)

Production Possibility Frontier (PPF)

Production Possibility Graph    (PPG)

• To show alternative ways to use an economy’s resources.

4 Assumptions of a PPG:

1. Two goods/resources
2. Fixed Resources (Land, labor, capital, entrepreneurship)
3. Fixed technology
4. Full employment of resources

Efficiency:

• Using resources in such a way as to maximize the production of goods and services.

Allocative Efficiency:

• Where products being produced are the ones that are most desired by society.

Productive Efficiency:

• Products are being produced in the least costly way.

Underutilization:

• Using fewer resources than the economy is capable of using.

Point A: Inside of the curve:
  1.) Attainable but inefficient
  2.) Underutilization

Point B : On the curve: 
  1.) Attainable &
  2.) Efficient 

Point C: Outside of the curve:
  1.) Unattainable

3 Movements of the PPC:

1. Inside the PPC/ curve (Occurs when resources are unemployed or underemployed.)
2. Along the PPC 
3. Shifts of the PPC

What causes the PPC/PPF to shift?

1. Technological changes
2. Change in resources
3. Economic growth
4. National disasters/ war/ famine
5. Change in labor force
6. More education (Ex: Training (Human capital))

January 13, 2016

Unit #1: Elasticity & Demand 

Elasticity & Demand:

• It is a measure of how consumers react to a change in price.

   Elastic Demand:

• Demand that is very sensitive to a change in price.
• Always greater than 1 (E>1)
• Product is not a necessity
• Available substitutes

   Inelastic Demand:

• Demand that is not very sensitive to change in price.
• Always less than 1 (E<1)
• Product is a necessity
• Few to no substitutes
• People will buy no matter what

   Unit/Unitary Elastic:

• Always equal to 1 (E=1)

      Elastic Demand                Inelastic Demand   

 Soda -> water                           Insulin/Medicine

 Steaks -> chicken                              Gas

 Candy -> cookies                               Salt

 Fur coat -> feather                             Milk

  

Price Elasticity of Demand (PED) 

Step 1: Quantity              (New quantity – Old quantity)

                                                        Old quantity

Step 2: Price                         (New price – Old Price)

                                                         Old Price

Step 3: PED                      (% ∆ in Quantity demanded)  

                                                                                          = PED

                                                      % ∆ in Price

January 14, 2016

Unit #1:Costs of Production

Total Revenue: 

• The total amount of money a from receives form selling goods and services.
• PXQ= TR

Fixed Cost: 

• A cost that does not change no matter how much is produced.
• Ex: Rent, mortgage, insurance, salaries

Variable Cost: 

• A cost that rises or falls depending upon how much is being produced.
• Ex: Electricity bill

Marginal Cost: 

• The cost of producing 1 or more units of a good.

TC = TFC + TVC

ATC = AFC + AVC

AFC = TFC / Q

AVC = TVC/Q

ATC = TC/ Q

TFC = AFC* Q

MC = new TC - old TC

TVC = AVC*Q

January 20, 2016

Unit #1: Supply & Demand

Equilibrium:

• The point at which the supply curve and the demand curve intersect. 
• At this point, all resources are being efficiently used.

Excess Demand: 

• Occurs when the quantity demanded is greater than the quantity supplied. 
• This will result in shortages, where consumers cannot get the quantities of items that they desire.

Price ceiling creates a shortage.  A price ceiling occurs when the government puts a legal limit on how high the price of a product can be.  In order for a price ceiling to be effective, it must be set below equilibrium.

Ex: The government sets a price ceiling on flu shots and shots are sold for less than what they are worth; therefore creating a shortage of flu shots. 

Ex: Rent control (New York & San Francisco)

Excess supply:

• Occurs when the quantity supplied is greater than the quantity demanded. 
• This will result in a surplus, where producers have inventories they cannot get rid of.

Price floor: 

• The lowest legal price a commodity can be sold at.
•  A price floor creates a surplus. 
• Price floors are used by the government to prevent prices from being too low. 
• The most common price floor is the minimum wage.

January 21, 2016
Unit #1: Business Cycle Phases

Peak:

• The highest point of real GDP. 
• it exhibits the greatest amount of spending and the lowest amount of unemployment.
• in this phase, inflation becomes a problem. 

Expansion:

• Real GDP is increasing.
• As a result of spending increasing & unemployment decreasing. 

Contraction/ Recession:

• Where real GDP declines for 6 months.
• In this phase, you having increasing unemployment and a decreasing in spending. 

Trough:

• Lowest point of real GDP - which includes the highest amount of unemployment and the least amount of spending.