Wednesday, February 10, 2016

Inflation and Unemployment Rate

Who is Hurt and Helped by Inflation?

  • Hurt
    • Savers
    • Lenders/ Creditors
    • People on a Fixed Income (Elderly, Welfare)
  • Helped
    • Debtors
Cost of Living Adjustments (COLA)- Automatic wage increase when inflation occurs
  • Ex- California
Unemployment- The failure to use available resources, particularly labor to produce desired goods and services

Labor Force- Those that are above 16 years of age and are able and willing to work
  • Labor Force= Employed + Unemployed
  • Not included in the Labor Force:
    • Military
    • Students
    • Retired
    • Disabled
    • Homeworkers
    • Mental Institutions
    • Jail/ Prisons
    • Those who are not looking for a job
Unemployment Rate- 4-5% = Full employment or Natural Rate of Unemployment (NRU)
  • Unemployment Rate= (# of unemployed/ (# of employed + # of unemployed)) x 100
Types of Unemployment- 
  • Frictional- Those who are searching for a job
    • Temporarily Unemployed
    • In Between Jobs
    • Have Transferable Skills
    • Ex- High School Graduate, College Graduate, Laid off Workers
  • Structural- Changes in the structure of the labor force that makes some skills obsolete
    • Doesn't have transferrable skills
    • Have to learn new skills to get a job
  • Seasonal- Due to the time of the year and nature of the job
    • Ex- Lifeguard, Construction workers, Santa Claus/ Easter Bunny impersonators 
  • Cyclical- Results from economic downturns such as recessions/ depressions
    • As demand for goods and service decrease, demand for labor falls off and workers get laid off
Frictional + Structural = NRU

Full Employment means there is no cyclical unemployment

Calculating GDP

Budget- Government purchases of goods/ services + government transfer payments- government tax and fee collection.

  • Postie= Deficit
  • Negative= Surplus

Trade- Exports - Imports

  • Positive= Surplus 
  • Negative= Deficit
National Income
  • Compensation of Employees + Rents + Interest + Corporate Profits + Proprietor's income
  • GDP - Indirect Business Taxes - Depreciation - net Foreign Factor Payment
Disposable Personal Income: National Income - Personal Household Taxes + Government Transfer Payments

Net Domestic Product (NDP): GDP - Depreciation 

Net National Product (NNP): GNP - Depreciation

GNP: GDP + net Foreign Factor Payment

Nominal and Real GDP
  • Nominal GDP: The value of output produced in current year prices
    • Price x Quanity
    • Can increase from year to year if either price or quantity increase
    • If we wanted to measure an increase in prices (inflation), use nominal GDP
  • Real GDP
    • Price x Quanity
    • Adjusted for Inflation
    • Used to measure economic growth
    • Can Increase from year to year only if output increases
GDP Deflator- Price index used to adjust from nominal to real GDP
  • (Nominal GDP/ Real GDP) x 100
  • In base year, GDP deflator always =100
  • For years after base year, GDP Deflator > 100
  • For years before base year, GDP Deflator < 100
Consumer Price Index(CPI)- Most commonly used measurement of inflation
  • Measures the cost of a market basket of goods of typical urban American family
  • (Cost of a Market Basket of goods in a given year/ Cost of a Market Basket of goods in the base year) x 100
Inflation Rate- ((Price Index in year 2 - Price Index in year 1)/ Price Index in year 1) x 100

Nominal Interest Rate-% increase in money where the borrower must pay the lender for a loan
  • NOT adjusted for inflation
  • Expected interest rate + Inflation premium
  • Unanticipated Inflation 
Real Interest Rate- % increase in purchasing power where the borrower must pay the lender for a loan
  • Adjusted for inflation
  • Nominal Interest Rate - Inflation
    • Fisher Effect
  • Anticipated Inflation

Tuesday, February 9, 2016

GDP (Gross Domestic Product)

Gross Domestic Product (GDP)- Market product of all final goods and services produced within a country's border in a given year.

Gross National Product (GNP)- Total value of all final goods and services by citizens of that country on its land/foreign land.

What's Included in GDP?

  • C- Personal Consumption Expenditures (Wages, Salaries) 
  • Ig- Gross Private Domestic Investment:
    • New Factory Equipment
    • Factory Equipment Maintenance 
    • Construction of Housing
    • Unsold Inventory (Of Products built in a year)
  • G- Government Spending
  • Xn- Net Exports (Exports-Imports)
What's not Included in GDP?
  • Intermediate Goods- Goods that require further processing before they are ready for final use
  • Used/Secondhand Goods- To avoid Double Counting
  • Purely Financial Transaction- Ex. (Stocks and Bonds)
  • Illegal Activities
  • Unreported Business Activity (Unreported tips)
  • Transfer Payment
    • Public (SS, Welfare, VA)
    • Private (Scholarships)
  • Non-Market Activity- Volunteer work or work that you do by yourself
2 Ways to Calculate GDP
  • Expenditure Approach- Add up all the spending on final goods and services produced in a given year.
    • GDP= C + Ig + G + Xn (Exports-imports)
    • Most preferred method
  • Income Approach- Adds up all the income that resulted from selling all final goods and services produced in a given year.
    • GDP= Wages + Rent + Interest + Profit + Statistical adjustments (indirect business taxes, depreciation, and net foreign factor payment)
Compensation of Employees- Wages, salaries, pensions, insurances, health, and welfare.

Rent- Income received by property owners.
    • From tenant to landlord
Interest: Money paid by private businesses to the suppliers of loans.
    • Mortgage, stocks/bonds
Corporate Projects- The income of the corporation's stockholders.
    • Dividends, corporate income taxes
Proprietor's Income- Income that comes from entrepreneurs and partners.

Circular Flow Diagram

Circular Flow Diagram- Represents the Transactions in an Economy

Product Market: 
  • Households sell resources and businesses buy resources
    • Ex- Goods and Services
Factor/Resource Market: 
  • Factors of Production- Land, Labor, Capital, & Entrepreneurship
    • Place where Households sell resources & business buys resources
Firms- An organization that produces goods and services for sale

Household- A person or group of people that share their income