Unit Two Notes

Unit two

1/26/16

·      Circular flow diagram- represents the transactions in a economy

·      Product market- Firms sell goods and services to the households

·      Factor market- it is the place where households sell their resources and businesses by those resources.

·      Firms- an organization that produces goods and services for sell.

·      Household- a person or group of people that share their income.

1/27/16

·      Gross Domestic Product (GDP)- it is the market value of all final goods and services produced within a nation in a given year.

·      What’s not included:

·      Intermediate goods- Something that needs further processing

·      Used or Second-hand goods- Has been counted before

·      Purely Financial Transactions- Stock, Bonds

·      Illegal Activities- (Ola-Drugs)

·      Unreported business activity (Ex. Tips)

·      Non Marker activities/ Transactions (Volunteering, babysitting)

·      Transfer payments- Scholarships, welfare, payments, social security

1/28/16

·      Included in GDP:

·      65% C- Personal Consumption expenditures (commissions)

·      17% IG- Gross Private Domestic Investments

Ex. Factory equipment Maintenance, New Factory Equipment, Construction of housing, Unsold Inventory of products built in a year.

·      20% G- Government Spending

·      -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

·      Spend most our money on weapons

1/29/16

2 ways to calculate GDP

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)	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)
Net Domestic Product=	GDP- Depreciation
Net National Product =	GNP- Depreciation
GNP=	GDP+ net foreign factor payment

·      Compensation of Employees-Wages and salaries could also include pensions, insurance, health and welfare.

·      Rents- income received by property owners.

·      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

·      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

·      (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.

·      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

	Quantity 2015	Quantity 2016	Price 2015	Price 2016
Pizzas	5	6	$10	$15
CD’s	4	5	$15	$20
Stereos	2	4	$600	$550
Automobiles	1	1	$10,000	$12,000

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

Hurt by inflation	Help by inflation
·      Savers	·      Debtors
·      Lenders/ Creditors – owe them nothing
·      People who are on a fixed income (Welfare/ Elderly)

·      C.O.L.A. (Cost Of Living Adjustments)- An automatic wage increase when inflation occurs (NY/ CA get it)

2/4/16

·      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:

Frictional	Structural	Seasonal	Cyclical
Those who are searching 4  a job	Changes of the stricture of the labor force, that make some skills obsolete	Due to the time of year and nature of the job	Results from economic downturns, such as a recession
Temporarily unemployed	Do not have transferable skills		As demand for goods and services, demand for labor falls and workers are laid off
In between jobs	Learn new skills to get a job
Transferable skills
Ex. College and high school Graduates	Ex. Spacecraft NASA to Car salesman	Ex. School Bus Drivers	Ex. Walmart/ Macys closing
Ex. Laid off/ leave job		Ex. Lifeguards
		Ex. Holiday people

Frictional + structural unemployment = NRU

Full employment means there is no Cyclical unemployment

2/5/16

·      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