Unit 2 notes: 02/04/16 continued



Frictional + structural = NRU (natural rate of unemployment)

Full Employment = NO cyclical unemployment due to recession


GDP Gap: 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 NRU (natural rate of unemployment), there is a GDP gap of about 2% that occurs.

Example: In 2012, the unemployment rate for Mexico was 7.4%, the NRU is 6%. What is the potential loss in GDP?
7.4 - 6 = 1.4      1.4 x 2 = 2.8 potential loss in GDP



Rule of 70: It is used to determine how many years it takes for a value to double given a particular annual growth rate.

Example: If you put 20,000 in the bank and it earns yearly interest of 7%, how many years will it take for your income to double?
70/7%= 10 years


Just to clarify, gross is what you make and net is what you take home.
NET private domestic investment + Depreciation = GROSS private domestic investment

Unit 2 Notes:  02/04/16

Employment 

Unemployment- failure to use available resources, particularly labor, to produce desired goods and services (people not working) 

Underemployment- not using all resources 

Labor Force- anyone above 16 years of age, able and willing to work
To calculate: employed + unemployed

Net Labor Force:

1. Military
2. Students
3. Retired
4. Disabled
5. Homemakers
6. Mental Institutions
7. Prison
8. Lazy (not looking for a job)

Standard Unemployment Rate- full employment, natural rate of unemployment (NRU)

To calculate:           #of unemployed     x 100 

             # of employed + # of employed (labor force)  

Types of Unemployment

Frictional:

• Those searching for a job
• Temporarily unemployed or in between jobs
• They have transferable skills, just not working

Examples: college, high school graduates, laid off

Structural:

• change in structure of labor force made some skills obsolete
• no transferable skills, jobs may never come back
• must learn new skills in order to get a job

Example: VCR fixer

(Frictional + structural = National rate of unemployment)

Seasonal:

• Due to the time of the year and nature of the job

Example: school bus driver, lifeguard, santa clause impersonator, construction worker

Cyclical:

• Results from economic downturns, such as recessions 
• As demand falls for goods and services, demand for labor falls, workers are laid off

 

Unit 2 notes: 02/02/16

Inflation= Price index in year 2 - price index in year 1  x 100
                             Price index in year 1

Real vs. Nominal Interest Rate 

Nominal Interest Rate- percentage increase in money that the borrower must pay the lender for a loan. 

Anticipated inflation (also known as the "fisher effect") = expected rate of interest + inflation premium

Real Interest Rate (adjusted for inflation) = nominal IR - inflation 

Unanticipated Inflation- percentage increase in purchasing power that the borrower must pay lender for a loan 

Unanticipated Inflation 

Hurts 

1. savers
2. creditors/ lenders
3. people in a fixed income such as  the elderly, welfare, social security, medicare, medicaid 

Helps 

1. debtors- they are locked in at that rate, the money that they pay back to lender has less purchasing power

Cost Of Living Adjustment 

Cola- an automatic wage increase when inflation occurs 

Unit 2 notes: 02/01/16
continued

Formulas: 
(NDP) Net Domestic Product= GDP - depreciation (consumption of fixed capital) 

(GNP) Gross National Product= GDP - net foreign factor payment 

(NNP) Net National Product= GNP - depreciation 

Nominal GDP- (quantity) = PxQ
-Measures inflation 
-Value of output produced in current year prices 
-Can increase from year to year if either output or prices increase 

Real GDP- (Output) = Current Year Output x Base Year Prices
-Value of output (quantity) produced in constant or base year prices 
-Adjusted for inflation
-Can increase from year to year only if quantity increases

If we want to measure economic growth, we will use Real GDP.
If we want to measure price increase (inflation), we will use Nominal GDP.

GDP Deflator- Price index used to adjust from nominal to real GDP. 
To calculate: Nominal GDP   x 100
                            Real GDP      
In base year, GDP deflator = 100
Years after base year, GDP deflator> 100
Years before base year, GDP deflator< 100

(CPI) Consumer Price Index- most commonly used measurement of inflation
-measures market basket of goods  for a typical urban american family 
To calculate: Price of market basket of goods in current year x 100
                      Price of market basket of goods in base year

Unit 2 notes: 02/01/16

Budget- government purchases of goods and services + government transferred payments + government tax and fee collections 
if + number, then deficit
if - number, then surplus 

Trade- exports- imports 
if + number, then surplus 
if - number, then deficit 

National income has two methods of calculation.

1. NI= compensation of employees + rental income + interest income + corporate profits + proprietors income
2. NI= GDP - indirect business taxes - depreciation - net foreign factor payment 

Disposable Personal Income (DPI)= national income - personal household taxes + transferred government payments 

Unit 2 notes: 01/29/16

Two ways of Calculating GDP

1. Expenditure Approach- add up all spending on final goods and services produced in a given year.                                                                                                                                                   To calculate: GDP= C+Ig+G+Xn ( exports-imports)
2. Income approach- add up all the income that resulted from selling all final goods and services produced in a given year. 

            To calculate: GDP= W (wages) + R (rents) + I (interest) + P (profits) + statistical adjustments: 

• Indirect business taxes 
• Depreciation (consumption of fixed capital) 
• Net foreign factor payment 

Both methods should give the same answer and both answers should equal. 

Compensation of Employees-  includes wages, salaries, fringe benefits, social security, health and pension pens 

Unit 2 notes: 01/28/16

Gross Domestic Product

GDP (gross domestic product)- total market value of all final goods and services produced within a country's borders in a given year.

GNP (gross national product)- total market value of all final goods and services by citizens of that country on its land or foreign land. 

What's included in GDP?

C: Personal Consumption Expenditures (65%)

      Examples: 

• commission
• wants and needs
• tuition  

Ig: Gross Private Domestic Investment (17%)

      Examples: 

1. Factory equipment maintenance 
2. New factory equipment
3. Construction of housing
4. Unsold inventory of products built in a year

G: Government Spending (20%)

      Example: 

• hiring

Xn: Net Exports (-2%) 

Brought in from somewhere else and sold in America

To calculate:  Net exports- imports

What's not included in GDP?

1. Intermediate Goods- Goods that require further processing before they are ready for final use. Examples: cars, backpacks, cellphones
2. Used/ second hand goods- avoid double counting Examples: pre-owned car, thrift store
3. Purely Financial Transactions- Does not involve the production of a good or service; merely a transfer of assets ( not durable)
4. Illegal Activity-drugs
5. Unreported Business Activities- unreported tips 
6. Transfer Payments- money from government.                                                                              -Public (social security, VA, welfare) -private (scholarships, parent to child)
7. Non-market Activity- volunteering, babysitting, performing work for oneself                    (mow lawn, fix your gate, plumbing, wages, income, borrowing, trading)