Unit 3 - Aggregate Demand

February 11, 2015

The aggregate demand shows the amount of real GDP that the private, public and foreign sector collectively desire to purchase at each possible price level. The relationship between the price level and the level of real GDP is inverse.

Three reasons AD is downward sloping

• Real-Balance effect: When the price level is high households and businesses cannot afford to purchase as much output. When the price level is low households and businesses can afford to purchase more output
• Interest-Rate effect: A higher price level increase the interest rate which tends to discourage investment. A lower price level decreases the interest rate which tends to encourage investment.
• Foreign purchases effect: The higher the price level, an increase in demand for relatively cheaper imports.

Shifts in AD

• Two parts to a shift in AD
• A ∆ in C, Ig, G, and/or Xn
• A multiplier effect that produces a greater change than the original ∆ in the 4 components.
• Increase in AD = AD >
• Decrease in AD = AD <

Consumption

• Households spending
• Consumer Wealth: More spending (AD Shifts >)
• Less wealth: Less spending (AD Shifts <)
• Consumer expectations
• Positive Expectations: More spending (AD Shift >)
• Negative Expectations: Less spending (AD Shift <)
• Household indebtedness
• Less debt: More spending (AD Shift >)
• More debt: Less spending (AD Shift <)
• Taxes
• Less taxes: More spending (AD Shift >)
• More taxes: Less spending (AD Shift <)

Gross private investment

• Te real interest rate
• Lower real interest rate: More investment (AD Shift >)
• Higher real interest rate: Less investment (AD Shift <)
• Expected returns
• Higher expected returns: More investment (AD Shift >)
• Lower expected returns: Less investment (AD Shift <)

Government spending

• More government spending (AD Shift >)
• Less government spending (AS Shift <)

Net exports

• Exchange rates (International value of $)
• Strong $ : More Imports and fewer exports (AD Shift <)
• Weak $ : Fewer imports and more exports ( AD Shift >
• Relative income
• Strong Foreign Economies: More exports (AD Shift >)
• Weak Foreign Economies: Less exports (AD Shift <)

Unit 2 - Unemployment

February 3, 2015

Unemployment: Is the percentage of people who do not have a job but are part of the labor force.

Labor force: The number of people in a country that are classified as employed or unemployed.
Unemployment rate = Number of unemployed / Number of unemployed + Number of Employed  X

100

Not in the labor force: Are kids, retired people, military personal, mentally insane, the incarcerated, full time students, stay at home parents, discourage workers.

Forms of Unemployment:

• Voluntary- Between jobs, new opportunities, new choices, new lifestyle, educational level.
• Seasonal- People wait for the right moment to conduct their trade. Ex: School Bus Driver, construction workers.
• Cyclical - Down turn in the business cycle, recession, down price.
• Structural- Associated with lack of skills, decline in industry, change in technology.

Full Employment when there is not cyclical unemployment present in the economy. Natural rate of unemployment (NRU) achieved when labor markets are in balanced 4-5%  
NRU = Structural UNP + Frictional UNP

Unemployment is good, because its less pressure to raise wages, more workers available in future expansions.

Unemployment is bad because, there is not enough consumption (GDP). There is too much poverty, too much government is needed

Okun's law - For every 1 % unemployed above NRU causes a 2 % decline in real GDP

Unit 2 - Inflation

February 2, 2015

Inflation: A rise in general level of prices. The inflation Standard 2% - 3%

Inflation Rate: Mesures percent increase. Key indicator of Economies Strength.

Deflation: Decline in general price level

Disinflation: Occurs when inflation rate declines

CPI: "Consumer Price Index" mesures inflation by tracking the yearly price of consumer goods and services. Indicates changes in price levels and price of living.

Formulas:

• Finding Inflation Rate Using market base data.                                                                                   Current  Year Market Basket value - Base Year Market value   X 100                                         Base Year Market value
• Finding Inflation  rate using price index                                                                                         Current year price index - Base year price index    X 100                                                                    Base year price index
• Estimating Inflation Using Rule of 70. Used to calculate the number of years it would take for 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 rate                                                                                                                 Real interest rate = Nominal interest rate - inflation premium 
• Cost of borrowing/lending money that's adjusted for expected inflation; expressed as percentage.
• Cause of inflation: 
• "Demand-pull inflation" Cost by excess of demand over output that pulls prices upward.
• "Cost-push inflation" Cause by a rise in per unit production rise due to increase resource cost
• Effect of inflation: Hurt people with fixed income, savers, lenders/creditors. Helps borrowers "return with dollars with less power), fixed contracts.
• Anticipated: People are told that they will get laid off ( Get a new job or spend less money)
• Unanticipated: People told its their last day in the job.

Unit 2 - Nominal/Real GDP

January 29, 2015

Nominal GDP: Value of Output produced in current prices   P x Q    In can increase from year to year. If either output or prices increases.

Real GDP: value of Output produced in constant or based year prices.. Adjusted for inflation   P x Q
Can increase from year to year only if output increases. "Current Production x Based Price"

Price Index: Mesures inflation by tracking changes in the price of market basket of goods compared to the base year.  Formula:      Price of Market basket of good in currents   X 100
                                                 Price of Market basket of good in base up

GDP: Its also a price index used to adjust from nominal GDP to real GDP.

•  In the base year the GDP Deflator will equal 100
• Years after base year the GDP Deflator will be greater than 100
• Years before tge base year the GDP Deflator will be less than 100

Formula:    Nominal GDP   X 100
                   Real GDP

Inflation Rate: Formula    New GDP Deflator - Old GDP Deflator    X 100
                                                     Old GDP Deflator

Unit 2 - Expenditure/Income approach

January 28, 2015

Expenditure Approach:  C + Ig + G + Xn = GDP 

• Add up the market value of all the domestic expenditures made on final goods and services in a single year.

Income Approach: W + R + I + P + Statistical Adjustments

• Add up all the income earn by households and firms in  a single year.
• W - Wages
• R - Rents
• I - Interest
• P- Profits (Proprietor's income)

Formulas

Budget: Government Purchases of goods and services + Government Transfer Payments - Government tax and Fee collection. If the number is positive its Budget Deficit, If the number its negative its a Budget Surplus.

Trade: Exports - Imports

GNP: GDP + Net Foreign Factor Payment 

NNP: "Net National Product"  GNP - Depreciation

NDP: "Net Domestic Product"   GDP - Depreciation

National Income: "There is 2 formulas"   GDP - Indirect Business Taxes - Depreciation - Net Foreign Factor Payment           Compensation Of Employees + Proprietors Income + Rental Income + Interest Income + Corpus Profits

Disposable Personal Income: National Income - Personal Household Taxes + Government transfer payments

Unit 2 - GDP

January 27, 2015

GDP: Gross Domestic Product total money value of all final goods and services produced within a countries borders within a year.

GNP: Gross National Product total value of all final goods and services produced by Americans in a year.

GDP:  Whats Included  C + Ig + G + Xn

• C - "Consumption" its the 67% to the economy, purchasing finished goods and services.
• Ig - "Gross Private Domestic Investment"
• Factory Equipment maintenances
• New factory equipment
• New construction Housing
• Unsold Inventory of Products build in a year.
• G - "Government Spending"
• Xn - "Net Exports  
• Formula    Exports - Imports

Whats Excluded in the GDP

• Used or Second Hand Goods
• Intermediate goods is the goods or services purchase to resale or further processing or manufacturing. This is excluded to avoid multiple or double counting.
• Non Market Activity
• Illegal drugs
• Any unpaid work
• Prostitution
• Baby Sitting
• Growing own food for personal consumption
• Fixing your own things
• Financial Transactions
• Bonds
• Stock
• Real-estate
• Gift or Transfer Payments
• Private: Produces no output transfer fund from one private individual to another.                         Ex- Scholarships
• Public: Various contribute nothing to the current output or production.                               Ex: Welfare, Social Security