GDP (Gross Domestic Product)

• Total dollar value of all goods and services produced within a country's borders within a given year

GNP (Gross National Product)

• Total value of all final goods and services produced by Americans in a year

Included in GDP:

• C+Ig+G+Xn
• C-Consumption
• 67% of the economy
• Final good or service
• 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
• Military Spending
• FBISD Hires New Workers etc.
• Xn-Net Exports
• Exports-Imports

Excluded from GDP:

1. Non-market Activities
• Volunteering
• Family Work
• Illegal drugs
2. Intermediate Goods
• Goods and services that are purchased for resale or for further processing and manufacturing
• Anything that goes into making a product
• Avoid multiple or double counting
3. Used or Secondhand Goods
• Clothing from a thrift shop
4. Financial Transactions
• Stocks
• Bonds
• Real Estate
5. Gifts or Transfer Payments
• Public
• Public transfer payments
• Recipients contribute nothing to the current production
• Welfare payments or social security
• Taxes paid by individuals are given to the public
  
  
  
• Private
• Private transfer payments produce no output
• Simply transfer funds from one private individual to another
• Ex: Scholarship

FORMULAS!! 😀😀😀

• C+Ig+G+Xn=GDP

• Budget= Government Purchases of Goods and Services + Government Transfer Payments - Government Tax and Fee Collection
  (If Number is Positive, It is a deficit. If Number is negative, it is a surplus)
• Trade= Exports-Imports
• GNP=GDP+Net Foreign Factor Payments
• NNP(Net National Product)= GNP-Depreciation
• NDP(Net Domestic Product) = GDP - Depreciation
• National Income =
• GDP-Indirect Business Taxes - Depreciation - Net Foreign Factor Payments
• Compensation of Employees + Rental Income + Interest Income + Proprietor’s Income + Corporate Profits
• Disposable Personal Income = National Income - Personal Household Taxes + Government Transfer Payments

Nominal GDP

• Value of output produced in current prices
• Price x Quantity = Nominal GDP
• Can increase from year to year if either output or price increase

Real GDP

• Value of output produced in constant or base year prices
• Price x Quantity = Real GDP
• Can increase from year to year only if output increases
• Output is measured by quantity
• Reason why real GDP reflects base year price is because it accounts for inflation
  
  
  
  

  Price Index

  • Measures inflation by tracking changes in the price in the market basket of goods compared with the base year
  • (Price of market basket of goods in current year)/(Price of market of goods in base year) x 100 = Price Index

  GDP Deflator

  • Price index used to adjust from nominal to real GDP
  • In the base year, GDP deflator will equal 100
  • For years after the base year, the GDP deflator is greater than 100
  • For years before the base year, the GDP deflator is less than 100
  • (Nominal GDP)/(Real GDP) x 100 = GDP Deflator

  Calculate Inflation

  
  

  • ((New GDP Deflator) - (Old GDP Deflator)) / (Old GDP Deflator) x 100

  
  

  
  

  
  
  
  
  
  
  
  

Inflation (notes from 2/2/15)

• Rise in general level of prices
• Standard for Inflation is 2-3%

Measuring Inflation

• Inflation Rate
• Measures the percentage increase in the price level over time
• Key indicator of the economy’s health
• Deflation
• Decline in the general price level
• Disinflation
• Occurs when the inflation rate itself declines

• CPI (which stands for consumer price index)
• Measures inflation by tracking yearly price of a fixed basket of consumer goods and services
• In addition, CPI indicates changes in the cost of living and the price level

Solving Inflation Problems

• Finding inflation rate using market basket data
• (Current year market basket value - Base year market basket value)/Base year market basket value x 100
• Finding inflation rate using price indexes
• (Current year price index - Base year price index)/Base year price index x 100
• Estimating inflation using the rule of 70
• Rule of 70 is used to calculate the number of years it will take the price level to double at any given rate of inflation
• Years needed to double inflation= 70/(Annual inflation rate)
• Determining real wages
• Real Wages = Nominal Wages/Price Level x 100
• Finding real interest rates
• Real Interest Rate = Nominal Interest Rate - Inflation Premium
• Cost of borrowing or lending money adjusted for expected inflation
• 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 upwards
• Cost-push Inflation
• Caused by a rise in per unit production cost due to increasing resource cost
• Effects of Inflation
• Helped by Unanticipated Inflation
• Borrowers- Debt will be repaid with cheap dollars
• People locked in Fixed Contracts
• Hurt by Unanticipated Inflation
• Fixed Income people
• Savers
• Lenders/Creditors
  
  
  (Cola means cost of living adjustments)

Unemployment

• Percentage of people that do not have jobs but are in the labor force

Labor Force

• Number of people in a country that are classified as either employed or unemployed

Unemployment Rate

• (# of Unemployed)/(# of unemployed + # of employed) x 100

Not in the labor force

1. Kids
2. Retired People
3. Military Personnel
4. Mentally Insane
5. Incarcerated
6. Stay at Home Parents
7. Full Time Students
8. Discouraged Workers

Official Employment Statistics

Start with total population of the U.S.

• Subtract those under 16
• Subtract those in military
• Subtract those that are institutionalized

This leaves the “Non Institutional Adult” population

• Subtract retired people
• Subtract homemakers
• Subtract full time students over the age of 16
• Subtract discouraged

This leaves the “Civilian Labor Force”

• Count employed (full/part time workers)
• Count employed (Unpaid workers in family business)
• Count those on strike, sick leave, vacation
• Count employed because they are actually looking for work

This becomes the “Unemployment Rate” in %

Four Types of Unemployment

• Frictional Unemployment- People between jobs (Choosing new opportunities, new lifestyle, new choices, new educational level)
• Seasonal Unemployment- Waiting for the right season to conduct your trade (Mall Santa Claus, Easter Bunny)
• Cyclical Unemployment- Downturns in business cycle (Recessions/Troughs)
• Bad for society and individuals
• Structural Unemployment- Lack of skills, decline in industry, technology changes
• Factory worker and factory moves somewhere else
• Can’t read or write

Full Employment

• Occurs when there is no cyclical unemployment present in the economy
• Natural Rate of Unemployment (NRU)
• 4-5% (Desired Goal)

Why is unemployment good?

• Less pressure to raise wages
• More workers are available for future expansions

Why is unemployment bad?

• Not enough consumption (GDP)
• Too much poverty
• Too much government assistance needed

Okun’s Law

1. For every 1% of unemployment above the natural rate of unemployment causes a 2% decline in Real GDP