Economic Norms

An overview of what the percentages of GDP, unemployment, and inflation rates indicate about the economy. 

What Counts in GDP?

Examples on what items are/not included in GDP.

Types of Unemployment

Unemployment→failure to use available resources (labor)
Employed→includes those that are self-employed

Unemployed:

1. new entrants
2. reentrants
3. laid off
4. lost last job (fired)
5. quit last job

NOT in labor force:

• military (armed services)
• homemakers
• students
• retirees
• disabled people
• those in mental institutions
• prisoners

Frictional	·         temporary, transitional, short-term (searching for job, in between jobs) ·         signals new jobs are available and reflects freedom of choice ·         people quit/got fired, or looking for a better job ·         graduates from college
Cyclical	·         economic downturn in business cycle (4) ·         deficient demand for goods and services (caused by recession) ·         jobs do come back (same one or another in field)
Structural	·         Deals w/ tech. 1) automation→job may become obsolete due to change in consumer tastes 2) creative destruction; as jobs are created, others are lost 3) change in skills (ex. NASA→cut program)
Seasonal	·         Jobs dependent on seasons/weather (ex. Lifeguard, Santa Claus, Easter Bunny, construction workers)

Unemployment rate formula→
(# of unemployed/total labor force-# of unemployed+# of employed-)x100
**standard unemployed rate>4-6%

Full employment (FE)→natural rate of unemployment (NRU)

• equal to structural and frictional unemployment
• FE does NOT mean 0 unemployment

Okun's Law:

• describes how unemployment relates to a nation's GDP
• states that for every 1% unemployment above the NRU, a (-) GDP gap of 2% will occur

Unequal burdens of unemployment:

1. rates are lower for white-collar workers
2. teens have highest rates
3. blacks have higher rates than whites
4. rates for males and females are comparable

Types of Inflation

Inflation→rise in general level of pricing; 2-3% inflation rate is wonderful ($ today can buy less than it did yesterday)
Deflation→decline in general price level (many industrious nations)
Disinflation→occurs when inflation rate itself declines

Solving inflation problems:

• Rule of 70→# of years it takes to double inflation (70/annual inflation rate)
• inflation rate→(current year price index-prior year price index)/prior year price index

Finding real interest rates: (real interest rate=nominal interest rate-inflation)→single digit #s

• Real interest rate→cost of borrowing/lending $ that's adjusted for expected inflation (always expressed as a %)
• Nominal interest rate→unadjusted cost of borrowing/lending $ (expressed as %)

Causes of Inflation:

• Demand-pull→caused by an excess of demand over output that pulls prices ↑; output and emplyment rise while price level is also rising; spending increases faster than production 1) ↑ in govt purchases 2) excessive increases in $ supply (create condition called "hyperinflation"→rapid rise in inflation rate 3) rising incomes as economy approaches full employment output
• Cost-push (supply side economics)→caused by rise in per unit production soct due to increasing resource costs; 2 sources 1) supply shocks→dramatic rise in energy or raw material prices due to input shortages or a growing demand for inputs 2) price wage spiral→where workers seek higher wages to offset higher consumer prices

Effects of Inflation:

-Anticipated~
-Unanticipated: has stronger effects because those expecting inflation may be able to adjust their work/spending habits to avoid/lessen effects
-Both: wages/pensions may have "cost of living adjustments" (COLAs) built in to offset anticipated inflation

1. fixed income groups (ex. grandparents) will be hurt→real income suffers (nominal income does not rise w/ prices)
2. savers will be hurt i.e. inflation takes away from interest earned on account (interest doesn't rise w/ prices)
3. borrowers can be helped by unanticipated inflation while lenders are hurt (debts will be repaid w/ cheaper $ than ones loaned out)

GDP

Gross Domestic Product (GDP):

• total value of all final goods and services produced in U.S. in a given (one) year
• includes all production and income earned w/in U.S. by U.S. and foreign producers
• does NOT include production outside U.S., even by Americans

Gross National Product (GNP):

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

Formula for GDP→C+Ig+G+Xn

• C=personal consumption (67%); purchases of finished goods and services
• Ig=Gross Private Domestic Investment; new factory equipment; construction of housing; factory equipment maintenance; unsold inventory built in a year
• G=Govt spending (ex. buy airplanes, buses)
• Xn=net exports (exports-imports)

Items NOT Counted in GDP:

• used/second-hand goods
• gifts (scholarships)
• stocks and bonds (recycling $)
• unreported business activities (cash tips)
• illegal activities (selling drugs, mafia)
• financial transactions between banks (switching $) and businesses
• intermediate goods→used to finish product
• non-market activities (babysitting, volunteering)

Expenditure Approach→C+Ig+G+Xn=GDP

• income generated from production of goods and services

Income Approach→W+R+I+P (wages+rents+interest+profits+statistical adjustments)→make balanced

• add all income generated from production of final output

**expenditure and income approach MUST be equal

Net Domestic Product (NDP)→GDP adjusted for depreciation (consumption of fixed capital)

National Income (NI)→income earned by American-owned resources, whether it is here/abroad

1. Net National Product (NNP)-Indirect Business Taxes (IBT)
2. CE+RI+II+CP+PI (compensation employee+rental income+interest income+corporate profits+proprietor’s income)
3. GDP-IBT-Depreciation-Net Foreign Factor Payment

Personal Income (PI)→income received by households regardless of source

Disposable Personal Income (DPI)→after tax income, available for household consumption

• NI-Household Taxes (HT)+Govt Transfer Payments (GTP)

Nominal GDP (NGDP)→measures GDP in current dollars, no matter what output is (PxQ)

  Real GDP (RGDP)→measures GDP in constant dollars, adjusted for inflation

GDP Deflator→measure of level of prices of all new domestically produced final goods and services in economy

• (NGDP/RGDP)x100

Inflation rate→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)

Consumer Price Index (CPI)→most widely used measure of overall price level in U.S.

• (price of market basket in particular year/price of same market basket in previous year)x100

GNP=GDP+Net Foreign Factor Payment

Net Private Domestic Investment+Depreciation=Gross Private Domestic Investment

*Net Domestic Product=GDP-Depreciation

*Budget=Govt Purchases of G&S and Govt Transfer Payments-Govt Tax & Fee Collections

*Trade=Exports-Imports

Circular Flow Model

Learn the Circular Flow Model from this amazing guy.

Unit 2: Types of Economies

Types of Eco. Systems:

1. Command (aka "centrally planned")-govt owns capital and land; controls labor (ex. Cuba)
2. Traditional-based on habits, rituals, and customs; decisions made by elders; discourages new ideas and technology (ex. tribes)
3. Mixed-businesses regulated by govt to protect public's interest (ex. U.S., Canada, Mexico)
4. Free Market-people and firms act in own best interest; buyers and sellers exchange goods and services (ex. Hong Kong-only true free market)

Three Eco. Questions:

1. What goods and services should be produced?
2. How should these goods and services be produced?
3. Who will consume these goods and services?

Market→an institution that allows buyers and sellers to trade
Households→a person or group of people that share an income
Firms→organization that produces goods and services for sell

Product Market	Factor Market (aka “Resource Market”)
·         Buyer usually consumer ·         Seller is a firm	·         Factors of production (4-land, labor, capital, entrepreneurship) ·         Buyer usually firm ·         Seller is factor owner