UNIT 2

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 maintenance
2. 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 prices
It can increase from year to year if either output or price increase

Real GDP

value of output produced in base year or constant prices
It 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.

Okun's Law

 for every 1% of unemployment above the NRU, causes a 2% decline in real GDP.