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:
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
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:
- Corporate income taxes.
- Dividends
- 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-
- 17 x $2200 = $37400
- 20 x $550 = $1100
- $37400 + $1100 = $48400
- 17 x $2000 = $34000
- 20 x $500 = $10000
- $34000 + $10000 = $44000
- Formula for Price Index- Price Market Basket of goods in current year/ Price Market Basket of goods in base year x 100
-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 (2/2/15)
Inflation: A rise in general level of prices.
- Standard inflation 2-3%
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
-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
Not in Labor Force
- Kids
- Military personnel
- Mentally insane
- Prison
- Retired
- Stay at home parents
- Full time students
- 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)
-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?
- Not enough consumption (GDP) Not working, not buying
- Too much poverty
- Too much government assistance
Why unemployment is good?
- Less pressure to raise wages
- 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) )