Unit 2 Notes

Types of Economic Systems 

• Command- (centrally planned economy); government owns factor of productions; do not support or encourage new ideas in technology. [ex. Cuba].
• Traditional- relies on habits, rituals & customs; usually the elders make the decision.
• Free Market- people in the firms act in their own self interest; allow buyers & sellers to exchange goods & services.
• Mixed- where the government controls some aspect of business production [ex. United States].

3 Economic Questions

1. What goods & services should be produced
2. How will these goods & services be produced
3. For whom will these goods & services be produced

2 Types of Market

• Market- it is an institution or mechanism allowing buyers & sellers to make trade.
• Product Market- the buyer is usually a consumer and the seller is a firm.
• Factor Market- hold factors of production (C.E.L.L); most important factor is labor; the buyer is usually the firm & the seller is factor owner.

Households- a person or a group of people that share their income.

Firms (business)- an organization that produces goods & services for sale

The Big Picture

Gross Domestic Product VS. Gross National Product

• GDP- the total value of all final goods and services produced within a country's borders within a given year.
• includes: all productions of income earned within the U.S by U.S and foreign producers.
• excludes: production outside of the U.S even by Americans.

• GNP- total value of all final goods and services produced by Americans in a given year.
• includes: production or income earned by Americans anywhere in the world.
• excludes: production by non-Americans even in the U.S

• GDP Formula: 
• C + Ig + G + Xm
• C- personal consumption. (goods/services that one purchased)
• Ig- Gross private domestic investment (factory equipment, new factory equipment, construction of housing, unsold inventory of production built in a year)
• G- government spending (government purchased of goods/services)
• Xn- net exports (Exports-Imports)

• GDP Included:

1. Final goods & services
2. Income earned (Wages.Rents.Interests.Profits)
3. Interest payment
4. Current production of goods & services
5. Unsold output (business inventory)

• GDP Excluded:

1. Used goods(scholarship)/second hand goods(ss#)
2. Gifts or transfers
3. Stocks
4. Unreported business activities
5. Illegal activity
6. Financial transactions between banks & businesses
7. Intermediate goods
8. Non-market activities (volunteering, street selling)

• Expenditure Approach
• Income generated from the production of goods & services
• C + Ig + G + Xn

• Income Approach
• Income generated from the production of final goods & services
• W + R + I + P + Statistical adjustments

What Counts in GDP

• Net National Product
• NNP: GNP - depreciation

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

• National Income (NI)
• Income earned by American owned resources whether it is here or abroad

1. NNP - IBT (indirect business taxes)
2. CE(compensation of employees) + RI(rent) + II(interest income) + CP(corporate profits) + PI(proprietors income)
3. GDP - IBT - Depreciation - Net foreign factor payment

• Disposable Personal Income
• DPI = NI - HT(household taxes) + GTP(government transferred payment)
• It's after tax income

• Trade
• Exports - Imports
• (+)# = surplus
• (-)# = deficit

• Budget
• Government purchases of goods & services + Government transferred payments - Government tax & fee collection
• (+)# = deficit
• (-)# = surplus

Nominal GDP VS. Real GDP

• NGDP 
• it measures GDP in current dollars no matter how much output has been produced
• Price X Quantity

• RGDP 
•  it measures GDP in constant dollars; it is adjusted for inflation by holding the purchasing power of the dollar constant; it is measured in based year prices
• Price(base year) X Quantity
• GDP Deflate
• (Nominal GDP/ Real GDP) x 100

• Inflation Rate
• Is a rise in the general level of prices
• [price index in year 2(current year) - price index in year 1(previous year) / price index in year 1(previous year)] x 100

• Consumer Price Index (CPI)
• It is the most widely used measure of the overall price level in the U.S
• [previous market basket in the particular year / price of the same market basket in 2000] x 100

• Inflation 
• an increase in the general price level

• Deflation 
• a decline in the general price level

Solving Inflation Problems

• Rule of 70: 
• how many years does it take to double inflation?
• 70 / annual inflation rate

• Finding Real Interest Rate
• Nominal interest rate - inflation

• Real Interest Rate
• the cost of bowrrowing or lending many that is adjusted for expected inflation ; it is expressed in percentages

• Nominal Interest Rate
• the unadjusted cost of borrowing or lending money.

Causes of Inflation

• Demand-Pull Inflation
• caused by excess of demand over output that pulls prices upward (3 sources)

1. Increase in government purchases
2. Excessive increases in the money supply. When you have too much money available, it is called hyperinflation - (have a rapid rise or high inflation rate)
3. Rising incomes as the economy approaches full employment output

• Cost-Push Inflation 
• (Supply-side economics) It is caused by a rise in per unity production cost due to increasing resource cost (2 sources)

1. Supply shocks- Dramatic increase in energy or law material prices due to input shortages or growing demand for inputs
2. Price rage spiral- Workers higher wages to offset rising consumer prices.

Effects of Inflation

• Unanticipated child have stronger effect because those expecting inflation may be able to adjust the work or spending activities.
• Wage and pensions have costs living expenses (COLAS) built into offset anticipated inflation
• Expected inflation increases the nominal cost for borrowing while unexpected inflation reduces the real cost or borrowing.

Hurt

• Fixed Income- because nominal income doesn't rise with prices
• Savers- because inflation takes away from the interest earn ion their account
• Lenders- debts will be repaid with cheap dollars than those are loaned out

Help

• Borrowers

Unemployment & Employ

Unemployment- failure to use unavailable resources
Employ- those who have a job, includes that are self-employed

5 Groups of Unemploy

1. New entrants
2. Re-entrants
3. Laid off - position down sized
4. Fired
5. Quit

Not in the Labor Force Group

- Armed services
- Homemakers
- Students
- Prison
- Retirees
- Disabled people
- People in mental institutions

Unemployment Rate - # of unemployed / total labor force [# of unemployed + # of employed] X 100

4 Types of Unemployment

Frictional

- temporary, short-term & transitional
- in-between jobs; searching for jobs

1. Composed of graduates (High school/College) that are looking for a job
2. People who quit are fired and are looking for a better job
3. Signals new jobs are available and it reflects freedom of choice.

Cyclical

• Caused by the recession stage of the business cycle due to a defficient demand for goods and services
• If you lose your job, these jobs will be back

Structural

• Deals with technology and long-term change
• Automation results in job losses due to consumer changing
• Creative Destruction as jobs are created, others are lost

Seasonal

• Depended upon the season or weather
• Construction workers, lifeguards, Santa Claus, Easter Bunny, school bus drivers

Full Employment (FE)

• Natural rate of unemployment (NRU)
• It is equal to structural and frictional unemployment
• Full employment does not mean zero unemployment

Okuns Law

• Describes how unemployment relates to a nations GDP
• State that for every 1% unemployment above the NRU, a negative GDP gap of 2% will occur.

Unequal Burdens of Unemployment

1. Rates are lower for white-collar workers
2. Teenagers have the highest rates
3. Blacks have higher rates than whites
4. Rates for males and females are comparable