GDP: total dollar value of all final goods and services produced within a country's borders within a given year.
Only what is produced within the country.
Nike falls on GDP and GNP
What is included in GDP?
C+Ig+G+Xn
C- consumption takes up 67% of economy. Includes final goods and services.
Ig: gross private domestic investment-
1. Factory equipment maintenance2. New factory equipment
3. Construction of housing
4. Unsold inventory of products built within a year
G: government spending - the government is buying weapons, FBISD buying new schools
Xn: net export- exports-imports (imports not included)
What is not included?
1.Used or second hand goods
2. Intermediate goods- goods and services that are purchased for resale or for further processing or manufacturing.
3. Non market activities- volunteer work, babysit, chores, illegal drug sales
4. Financial transactions- stocks, bonds, real estate. GDP only counts production.
5. Gifts or transfer payments
Public - recipients contribute nothing to the current production
Ex) social security, welfare payments
Private - no output produced, simply transferring funds from one individual to another.
Ex) a scholarship, Christmas gift
GNP- A measure of what its citizens produced and whether they produced these items within its borders.
National income accounting
Economists collect statistics on production, income, investment, and savings.
Expenditure approach
Adding up the market value of all domestic expenditures made on final goods and services in a single year.C+Ig+G+Xn = GDP
Income approach
Adding up all the income earned by households and firms in a single year.Wages- compensation from employees, or salaries
Rents- from tenants to landlord, from lease payments that corporations pay for the use of space.
Interest- money paid by private businesses to the suppliers of loans used to purchase capital. Ex) savings account, corporate bond
Profit-
Can be seen as:
1. Corporate income taxes
2. Dividends
3. Undistributed corporate profits
W+R+I+P+ Statistical Adjustments
Nominal GDP
Value of output produced in current pricesIt can increase from year to year if either output or price increase
Real GDP
value of output produced in base year or constant pricesIt is adjusted for inflation
It can increase from year to year only if output increases
Price x quantity
Base year is always the earlier year
Price index- a measure of inflation by tracking changes in a market basket of goods compared with the base year.
Price of market basket of goods in current years/price of market basket goods in base years x 100
Equations:
Budget = Gov't purchases of goods and services + Gov't transfer payments - Gov't tax and fee collections
Trade = Exports - Imports
GNP = GDP + Net foreign factor income (Use Expenditure Approach to GDP)
Net National Product (NNP) = GNP - Depreciation
Net Domestic Product (NDP) = GDP - Depreciation
National Income = GDP - Indirect Buisness Taxes - Depreciation - Net foreign factor payment
or Compensation of employees + Rental Income +Interest Income + Proprietor's income + Corporate profits
GDP deflator
a price index used to adjust from nominal GDP to real GDP.Nominal GDP/Real GDP x 100
In the base year, GDP deflator is equal to 100. For years after base year, GDP is greater than 100. For years before the base year, GDP deflator is less than 100.
Inflation
a rise in the general level of prices.New GDP deflator-old GDP deflator/ old GDP deflator x 100.
Inflation rate
it measures the percentage increase in the price level over time. It offers a key indicator of the economy's health.Deflation - a decline in the general price level.
Disinflation - occurs when the inflation rate declines.
Consumer price index (CPI)
it measures inflation by tracking the yearly price of a fixed basket of consumer goods and services. It indicates changes in price level and cost of living.Solving 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 x 100
2. Finding inflation rate using price indexes
Current year price index - base year price index / base year price index x100
3. Estimating inflation using the rule of 70
Rule of 70
used to calculate the number of years it will take for the price level to double at any given rate of inflation.Rule of 70 -Years needed to double inflation = 70/ annual inflation rate
4. Determining real wages- real wages= nominal wages/ price level x 100
5. Finding real interest rates
Real interest rate= nominal interest rate- inflation premium
The cost of borrowing or lending money that is adjusted for inflation. Always expressed as a percentage.
Nominal interest rate- unadjusted cost of borrowing or lending money
Causes of inflation
Demand pull inflation- caused by an excess of demand over output that pulls prices upward.Cost push inflation- caused by a rise in per unit production cost due to increasing resource cost.
Standard for inflation is 2-3% anything over is a problem.
Effects of inflation
Anticipated inflation-Unanticipated inflation-
Helped by inflation
Borrowers- debt will be repaid with cheaper dollars than those that were loaned out.
Hurt by unanticipated inflation
Fixed income- grant, scholarship
Savers- those who save money.
Lenders/creditors
Unemployment
the percentage of people who do not have jobs that are in the labor force.Labor force- number of people in a country that are classified as either employed or unemployed.
Unemployment rate- number of unemployed/ number of unemployed + number of employed x 100
4-5% is ideal unemployment rate
Not in the labor force
1. Kids
2. Military personnel
3. Mentally insane
4. Incarcerated or in prison
5. Retired
6. Stay at home parents
7. Full time students
8. Discouraged workers
Types of unemployment
1. Frictional- people who are"between jobs" . They choose new opportunities, new choices, new lifestyles, new educational levels
2. Structural- technology changing, it is associated with a lack of skills or a declining industry.
3. Seasonal- you are waiting for the right season to go to work. Ex) construction workers, life guards
4. Cyclical - unemployment that occurs due to a swing in the economy. Has to do with the business cycle. Bad for individuals and societies.
Full employment
occurs when there is no cyclical unemployment present in the economy.This is when the economy is working at its best potential.
Natural rate of unemployment (NRU)
4-5% rate
Why is it bad?
1. Not enough consumption (GDP)
2. Too much poverty
3. Too much government assistance
Why is unemployment good?
1. There is less pressure to raise wages
2. There are more workers available for future expansions.
