Unit 2 Notes

Circular Flow Chart 

Circular Flow Chart 

GDP: Gross Domestic Product; total dollar value of all final goods & services produced within a country's borders within a given year. (ONLY compass what is produced in AMERICA; can DECREASE when not spending money) 

GNP: Gross National Product; it measures of what its citizens produced and whether they produce these items within its borders. 

National Income Accounting: Economist collets statistic on production, income, investment, and savings. 

Number 1 sign of checking GDP- Gas money; transportation. 

Formula to GDP- C+Ig+G+Xn

What's included in GDP?

• C- Consumption; takes 67% of economy's final goods and services; even part of wages.
• Ig- Gross Private Domestic Investment; factory equipment maintenance, new factory equipment, construction of housing, unsold inventory of products built in a year. 
• G- Government Spending; government buying military weapons, buying school/ bus.
• Xn- Net Exports; Exports-Imports

What's  NOT included in GDP?

• Used/second hand goods (Hand me downs)
• Intermediate Goods: Goods & services that are purchased for resale or for further processing/ manufacturing (NOT COUNTED; BUYING WHOLE CAKE NOT LAYERS)
• Non-Market Activities: Volunteer work. (Ex. baby sit, illegal drug sales, underground activities) 
• Financial Transactions: Stocks, bonds, real-estate 
• Gifts/Transfer Payments:

Public- recipients contribute nothing to cut tent production. (Ex. Social security, welfare payments)

Private- Produces no output; simply transferring funds from 1 individual to another. (Ex. scholarship, Christmas gift) 

GDP & GNP Formulas (1/28/15)

Budget: Gov. purchases of goods & services + Gov. transfer payments - Gov. tax & fee collections 

Positive- budget deficit

Negative- budget surplus

Trade: Exports - Imports 

GNP: GDP + Net Foreign Factor Income (use expenditure approach for GDP)

Net National Product (NNP): GNP - Depreciation 

NDP: GDP - Depreciation 

National Income: GDP - Indirect Business Taxes - Depreciation - Net Foreign Factor Payment

OR

                            Compensation of Employees + Rental Income + Interest Income + Proprioriters               Income + Corperate Profits

Disposal Personal Income: National Income - Personal Household Taxes + Gov. Transfer Payments

Expenditures Approach: Adding up market value of all domestic expenditures made on all final goods & services in a single year.
C + Ig + G + Xn (Exports-Imports) = GDP

Income Approach (WHAT YOU REPORT): Adding up all income earned by households and firms in a single year.
GDP= W + R + I + P + Statistical Adjustments

• Wages: Compensation of employees; salary.
• Rents: From tenants to land lords; lease payments that corporations pay for use of space.
• Interest: Money payed by private businesses to suppliers of loans, used to purchase capital.
• Profit:

1. Corporate income taxes.
2. Dividends 
3. Undistributed corporate profits. (Ex. dividens, depreciation, wages & salaries, corporate income tac, undistributed rotate profits, net foreign factor income earned)

Nominal GDP v. Real GDP (1/29/15)

Nominal GDP: Value of output produced in current prices; can increase from year to year of either output are price increase.

Real GDP: Value of output produced in base year or constant prices; adjusted for inflation; can increase from year to year only if output increases. (Base year/ earlier year) 

Nominal GDP & Real GDP Formula- P X Q

Calculating Nominal & Real GDP Ex:

                   Yr.1 Q          Yr.4 P          Yr.1 P          Yr.4 Q       

Comp.            10                17              $2000         $2200

T.V                 15                20              $500           $550    

Nominal GDP Steps-

1. 17 x $2200 = $37400
2. 20 x $550 = $1100
3. $37400 + $1100 = $48400

Real GDP Steps-

1. 17 x $2000 = $34000
2. 20 x $500 = $10000
3. $34000 + $10000 = $44000

Price Index: A measure of inflation by tracking changes in market basket of goods compared with the base year. 

• Formula for Price Index- Price Market Basket of goods in current year/ Price Market Basket of goods in base year x 100

GDP Deflector: Price index used to adjust from Nominal GDP to Real GDP

-In base year, GDP deflector is equal to 100

-For years after base year, GDP deflector is greater than 100

-Years before base year, GDP deflector is less than 100

• Formula for GDP Deflector- Nominal GDP/ Real GDP x 100

Inflation Formula- New GDP Deflector - Old GDP Deflector/ Old GDP Deflector x 100

Inflation (2/2/15)

Inflation: A rise in general level of prices. 

• Standard inflation 2-3%

Inflation Rate: It measure the percentage increase in price level over time; offers key indicator pf economy's health. 

Deflation: Decline in general price level.

Disinflation: Occurs when inflation rate declines.

Consumption Price Index (CPI): Measures inflation by tracking yearly price of fixed basket of consumer goods & services;indices changes in price level and cost of living.

• Solving inflation problems: 

A) Finding inflation rate using basket market.
-Curent year market basket - Base year market basket value / Base year market basket value x 100

B) Finding inflation rate using price indexes 
-Curent year price index - Base year index / Base year price index x 100

C) Estimating Inflation
-Rule of 10 used to calculate number of years it would take for price level to double at any given rate of inflation.

• Ex. Years needed to double inflation = 70 (Annual rate is 5%); Years needed to double 14

D) Determining real wages. 
-Real wages = Nominal Wages / Price Level x 100

E) Finding Real Interest Rate
-Real interest rate - Nominal interest rate - inflation premium will give you real interest rate.

Real Interest Rate: The cost of borrowing or lending money that is adjusted for inflation; always expressed as percentage.

Nominal Interest Rate: Unadjusted cost of borrowing or lending money,

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.

Causes of Inflation

A) Demand Pull Inflation: Caused by an excess of Demand over Output that pulls prices upward. (Ex. Concert; more people, more higher prices, closer seats.)

B) Cost Pull Inflation: Caused by a rise in per uint production cost due to increasing resource cost. (Ex. If gas oil goes up, plane tickets go up.)

Effects of Inflation:

• Anticipated- Expecting to happen.
• Unanticipated- Suddenly happening. (Ex. Manager says everybody is fired; sudden)

Hurt by Inflation

• Fixed Income (Ex. Social Security, scholarship, grants)
• Savers (Can not change)
• Lenders/ Creditors (Worth less)

Help by Inflation

• Borrowers- debt will be repaid with cheaper dollars than those loaned out. 

Unemployment (2/3/15)

Unemployed: Percentage of people who do not have jobs but in labor force.

Labor Force: Number people in country that are classified either employed or unemployed

• Unemployment Rate Calculation: Number unemployed/ Number unemployed + Number employed x 100

Unemployment Percentage: 4-5%

Not in Labor Force

1. Kids
2. Military personnel 
3. Mentally insane 
4. Prison
5. Retired 
6. Stay at home parents 
7. Full time students
8. Discourage workers 

Types of Unemployment

• Frictional: "Between jobs" People between jobs because they choose new opportunities, choices, life styles, new education levels. 
• Structural: Technology changing, lack of skills, declining industry (NASA, type writer technician)
• Seasonal: Waiting right season to go to work. (Ex. Santa Claus, easter bunny, life guards)
• Cyclical: Occurs due to swing in economy deals with business cycle. (Ex. Trough)

Full Employment: Occurs when no cyclical

-Unemployment is still present but only 4-5%; Economy producing at full potential possible. (Not everybody working)

National Rate of Unemployment (NRU): 4-5%

Why unemployment is bad?

1. Not enough consumption (GDP) Not working, not buying 
2. Too much poverty 
3. Too much government assistance

Why unemployment is good?

1. Less pressure to raise wages
2. More workers available for future expansion. 

Okun's Law: For every 1% of unemployment above the NRU causes 2% decline in real GDP (Ex. If unemployment 3.5%, NRU is 7% (3.5 x 2 = 7) )

Unit 1 Notes (1/15/15)

• Shortage: QD > QS
• Surplus: QS > QD
• Equilibrium: Point at which supply curve and demand curve intersect; economy using resources efficiently 
• Price Ceiling: Government imposed limit on how high you can charge for product/service.

Price Ceiling Graph:

Price Floor Graph: 

• Price Floor: Happens above equilibrium. (Ex. Minimum Wage) PxQ
• Fixed Cost: Cost that does not change no matter how much is produced . (Ex. Rent, Mortgage, Car note)
• Variable Cost: Cost that fluctuates; up and down change. (Ex. Gas, water bill) 

Equations: 

Marginal Cost: New TC- Old TC

Total Cost: TFC + TVC

AFC: TFC/Q

AVC: TVC/Q

ATC: AFC + AVC OR ATC/Q

New TC: Old TC + MC

Unit 1 Notes (1/13/15)

• Elasticity Demand: Drastically how buyers will but back when price rises or falls. 

• Elastic Demand: Demand for product that will change regardless of price. E>1 

Ex.- "Wants", movie tickets, steak, fur coats.

• Inelastic Demand: Demand for product that will not change regardless of price. E<1

Ex.- "Needs", milk, salt, gasoline, medicine (insulin)

• Unit Elastic: E=1

Elasticity Equations Steps:

1.) New Quantity- Old Quantity/ Old Quantity
2.) New Price- Old Price/ Old Price
3.) % Change in Quantity (take absolute value)/ % Change in Price

Unit 1 Notes: Demand and Supply (1/12/15)

Demand:

Demand Schedule:
Oranges

Demand Curve:

• Demand is: the quantities that people are willing and able to buy at variable prices.

• The Law of Demand: there is an inverse relationship between price and quantity.

(Price goes up, Quantity goes down) (Price goes down, Quantity goes up)

• What causes a "change in quantity demanded"? 

Change in price. 

• What causes a "change in demand"?

1.) Change in buyers taste. (advertisers)

2.) Change in number buyers. (population)

3.) Change in income

Normal Goods- Goods buyers buy more of when income rises.

Inferior Goods- Buyers buy less of when income rises. 

4.) Change in price of related goods. 

Substitute Goods- Serve roughly same purpose to buyers. (Ex. Coca Cola, Pepsi)

Complimentary Goods- Often consumed together (Ex. Automobile,Gas; French fries,Ketchup)

5.) Change in expectations- thinking of future. (Ex. Next week, next month) 

Supply:

Supply Schedule:

Yards

Supply Curve: 

• Supply is: the quantities that producers/sellers are willing and able to produce/sell at various prices.
• The Law of Supply: There is a direct relationship between price and quantity supply (Price goes up, Quantity goes up) (Price goes down, Quantity goes down)
• What causes a "change in quantity supplied"? 

Change in price.

• What causes a "change in supply"? 

1.) Change in weather.
2.) Change in technology.
3.) Change in taxes/subsidies.
4.) Change code of production.
5.) Change number of sellers.
6.) Change in expectations.

Unit 1 Notes (1/8/15)

Trade-offs: Alternatives we give up when we choose 1 course of action over another. (Do this every day)

Opportunity Cost: The most desirable alternative given up by making a decision. 

Production Possibility Graph: Shows alternative ways to use resources. 

Graph Ex.

PPC- Production Possibility Curve.

PPF- Production Possibility Frontier.






Point A- Efficient but produce more machines.
Point B- Efficient.
Point C- Efficient but producing more food.
Point D- Underutilization; attainable but inefficient 
How? - Decrease in population, Recession  War/Feminine, Underemployment/Unemployment (INSIDE CURVE) 
Point E- Unattainable.
How?- Economic growth, Technology, New Resources. 

Productive Efficiency: Producing a lowest cost and allocation resources efficiently and fill employment of resources. (any point of curve) 

Allocative Efficiency: Looking where to produce on the curve. (where to produce on the curve)


(Double lines can happen)









Added Notes to Production Possibility Graphs:

1. 2 goods are produced.
2. Full employment. (unemployment have to be 4-5%)
3. Fixed Resource (Land, labor, capital)
4. Fixed state of technology.
5. No international trade.

Unit 1 Notes (1/7/15)

Macroeconomics vs. Microeconomics

Macroeconomics: Study of major components of economy. (Ex. Inflation, GDP, international trade)

Microeconomics: Study of how households make decisions and how they interact in market. (Ex. Supply & Demand, market structures) 

Positive vs. Normative Economics

Positive: Claims that attempt to describe world as it is; very descriptive. (FACT) (Ex. Minimum wage laws changes unemployment) 

Normative: Claims that attempt to describe how the world should be; very prescriptive in nature. (OPINION) (Ex. Government should raise the minimum wage.) 

Needs vs. Wants

Needs: Basic requirements for survival.

Wants: Desires of citizens. (more broader than needs)

Scarcity vs. Shortage

Scarcity: Most fundamental economy; problem funding all society. 

What is it? Satisfying unlimited wants with minimal resources. (MORE PERMANENT) (Ex. Water, oil) 

Shortage: Situation quantity demand is greater than quality supply. QD>QS (TEMPORARY) 

Goods vs. Services: 

Goods: 2 types of goods-

Consumer Goods: Goods intended for final use by the consumer. (Ex. chocolate)

Capital Goods: Items used in creation of other goods. (Ex. factory machinery, trades)

Services: Work that is performed for someone else. 

Factors of Production:

1. Land: Natural resources. 
2. Labor: Work force.
3. Capital: 2 Types 

Human Capital: Knowledge and skills gain through education and experience. 

Physical Capital: Human made objects used to create other goods and services. 

4.  Entrepreneurship: To be entrepreneur, have to be innovator and risk taker.