Wednesday, February 10, 2016
Unit Two Notes
Unit two
1/26/16
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Circular flow diagram- represents the
transactions in a economy
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Product market- Firms sell goods and services to
the households
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Factor market- it is the place where households
sell their resources and businesses by those resources.
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Firms- an organization that produces goods and
services for sell.
·
Household- a person or group of people that
share their income.
1/27/16
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Gross Domestic Product (GDP)- it is the market
value of all final goods and services produced within a nation in a given year.
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What’s not included:
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Intermediate goods- Something that needs further
processing
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Used or Second-hand goods- Has been counted
before
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Purely Financial Transactions- Stock, Bonds
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Illegal Activities- (Ola-Drugs)
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Unreported business activity (Ex. Tips)
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Non Marker activities/ Transactions
(Volunteering, babysitting)
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Transfer payments- Scholarships, welfare,
payments, social security
1/28/16
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Included in GDP:
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65% C- Personal Consumption expenditures (commissions)
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17% IG- Gross Private Domestic Investments
Ex. Factory equipment Maintenance, New
Factory Equipment, Construction of housing, Unsold Inventory of products built
in a year.
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20% G- Government Spending
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-2% Xn- Net Exports (Exports- Imports)
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
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Spend most our money on weapons
1/29/16
2
ways to calculate GDP
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Expenditure (Spend) Approach- Add up all of the spending
on final goods and services produced in a given year
Formula: GDP=C+Ig+G+Xn(Exp-Imp)
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Income Approach- Adds up all the income that resulted from
selling all final goods and services produced in a given year
Formula: Wages+Rents+Interest+Profit+Statistical
Adjustments (Indirect business taxes, Deprecation, net foreign factor
payment)
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Net Domestic Product=
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GDP- Depreciation
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Net National Product =
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GNP- Depreciation
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GNP=
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GDP+ net foreign factor payment
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Compensation of Employees-Wages and salaries
could also include pensions, insurance, health and welfare.
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Rents- income received by property owners.
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Interest- money paid by private businesses to
the suppliers of loans.
·
Corporate Profits- the income of the
corporation’s tock holders. Ex. Dividends and corporate income taxes
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Proprietor’s income- it comes from entrepreneurs
and partners in a business
QUESTIONS:
1.
In a
circular flow diagram, what are the two markets? What roles do households play
and what role do businesses play in each market?
The factor market and the product market are
the two markets in a circular flow diagram. In the product market firms sell
goods and services to the households, while the factor market is the place
where households sell their resources and businesses by those resources.
2.
In a
circular flow model, what are the income flows? What are the expenditure flows?
In a circular flow model, the income
flow is the movement of service from firms to households through the Factor
market. The expenditure flows from the purchase of goods, through firms to
households.
3.
What
is the definition of GDP (in your own words)? How are the values of output
produced at a U.S. owned factory in the United States and a foreign-owned
factory in the United States treated in GDP counting?
GDP is the money value of all final goods and
services made in a nation in a certain period of time, it being a year. The
value of output produced at an American-owned factory in the U.S. and a
foreign-owned factory would be treated as part of domestic output in GDP
accounting.
4.
How
does GDP accounting avoid multiple counting and exaggeration of the value of
GDP?
GDP accounting avoids multiple counting
and exaggeration of the values of GDP by measuring only the value added. GDP
includes only final goods and services
2/1/16
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(PxQ)
Nominal GDP- the value of output produced in current year prices.
-Can
increase from year to year, if either price or quantity increases.
·
(PxQ)
Real GDP- Value of output produced in constant base year prices.
Adjusted
for inflation
-Can
increase from year to year, only if output increases.
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Both:
-If we
wanted to measure economic growth we use real GDP.
-If we
wanted to measure a increase in prices, known as inflation, we will use nominal
GDP
Base year is the
earliest year
Ex. 2015
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Quantity 2015
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Quantity 2016
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Price 2015
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Price 2016
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Pizzas
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5
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6
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$10
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$15
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CD’s
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4
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5
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$15
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$20
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Stereos
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2
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4
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$600
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$550
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Automobiles
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1
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1
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$10,000
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$12,000
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Real GDP in 2015: $11,310
Real GDP in 2016: $12,535 Current quantity X Base year price
Nominal GDP in 2015: $11,310
Nominal GDP in 2016: $14,390
·
GDP Deflator- price index used to adjust from
nominal to real GDP
Formula: Nominal GDP/Real GDPx100
-in the base year GDP deflator always
equals 100
-for years after the base year, GDP
Deflator is greater than 100
-for years before the base year, GDP
deflator is less than 100
·
Consumer price index- the most commonly used
measurement of inflation
-Measures the cost of a market basket of
good, of a typical urban American family.
Formula: Cost of a market basket of goods
in a given year/ cost of a market basket of goods in the base yearx100
·
Inflation Rate- Price index in year 2- price
index in year 1/ price index in year 1
New-Old/Old
2/2/16
·
Nominal interest rate- it is the percentage
increase in money the borrower must pay the lender for a loan.
-not adjusted for inflation
·
Real interest rate- it is the percentage
increase in purchasing power the borrower must pay the lender for a loan.
-adjusted for inflation
Formula: Nominal interest rate-
inflation
-Unanticipated Inflation
·
Anticipated Inflation
-Fisher effect
Formula- nominal interest rate=Expected
interest rate + Inflation premium
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Hurt
by inflation
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Help by inflation
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Savers
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Debtors
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Lenders/ Creditors – owe them nothing
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People who are on a fixed income (Welfare/
Elderly)
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C.O.L.A. (Cost Of Living Adjustments)- An
automatic wage increase when inflation occurs (NY/ CA get it)
2/4/16
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Unemployment- it is the failure to use available
particularly labor to produce desired goods and services.
·
Underemployment- work less than 12 hrs
·
Labor force- employed plus unemployed
-Above 16 yrs of age
-Able and willing to work
·
Not in the Labor Force
-Military
-Students
-Retired
-Disabled
-Homemakers
-Mental Patients
-Jailed/Prison
-Not looking for job
·
Unemployment rate- 4 to 5% = Full employment or
Natural rate of unemployment (NRU)
·
How to calculate the unemployment rate:
# of unemployed/ # of employed + unemployed
X 100 = Labor Force
Types of Unemployment:
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Frictional
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Structural
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Seasonal
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Cyclical
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Those who are
searching 4 a job
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Changes of the stricture of the labor force, that make
some skills obsolete
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Due to the time of year and nature of the job
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Results from economic downturns, such as a recession
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Temporarily
unemployed
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Do not have transferable skills
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As
demand for goods and services, demand for labor falls and workers are laid
off
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In between jobs
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Learn new skills to get a job
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Transferable skills
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Ex. College and high school Graduates
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Ex. Spacecraft
NASA to Car salesman
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Ex. School Bus
Drivers
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Ex. Walmart/ Macys
closing
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Ex. Laid off/ leave job
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Ex. Lifeguards
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Ex. Holiday
people
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Frictional + structural unemployment = NRU
Full employment means there is no Cyclical
unemployment
2/5/16
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GDP Gap- the amount by which actual falls short
of potential GDP
·
Okun’s Law: for every 1% in which the actual
unemployment rate exceeds the NRU a GDP gap of about 2% occurs
Ex. In 2012 the unemployment rate for
mexico was 7.4% the NRU for mexico is 6%
(7.4-6.4)*2
(actual unemployment rate-NRU)*2
·
Rule of 70: it is used to determine how many
years it takes 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 for your income to double?
10 years 70/7=10
70/ interest rate= # of years
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