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