GDP:
total dollar value of all final goods and services produced within a country's borders within a given year. (Nike is an example of something included in GDP)
What is included in GDP?
C + Ig + G + Xn
C - consumption takes up 67% of eceonomy. This includes final goods and services.
Ig - gross private domestic investment
1. Factory equipment maintenance
2. New factory equipment
3. Construction o housing
4. Unsold inventory of products built within a year
G- government spending (government is buying weapons, FBISD buying new schools)
Xn - net export is exports minus imports (imports are not included)
What is not included?
1. Used or second hand goods
2. Intermediate goods - goods and services that are purchased for resale or for further processing or manufacturing
3. Non market activities (volunteer work, babysitting, chores, illegal drug sales)
4. Financial transactions (stocks, bonds, real estate. GDP only counts production)
5. Gifts or transfer payments (social security, welfare payments, scholarship, Christmas gift)
GNP:
A measure of what its citizens produced and whether they produced these within its borders
National Income Accounting:
Economists collect statistics on production, income, investment, and savings.
Expenditure Approach:
Adding up the market value of all domestic expenditures made on final goods and services in a single year.
C + Ig + G + Xn = GDP
Income Approach:
Adding up all the income earned by households and firms in a single year.
Wages - compensation from employees, or salaries
Rents - from tenants to landlord, from leases payments that corporations pay for the use of space.
Interest - money paid by private businesses to the suppliers of loans used to purchase capital. (savings account, corporate bond)
Profit - Can be seen as:
1. Corporate income taxes
2. Dividends
3. Undistributed corporate profits
W + R + I + P + Statistical Adjustments
Nominal GDP:
Value of output produced in current prices it can increase from year to year if either output or price increase
Real GDP:
Value of output produced in base year or constant prices. It is adjusted for inflation
It can increase from year to year only if output increases
Price x Quantity
Base year is always the earlier year
Price Index - a measure of inflation by tracking changes in a market basket of goods compared with the base year.
Price market basket of goods in current year/price of market basket goods in base year x 100
Equations:
Budget = Gov't purchases of goods and services + Gov't transfer payments - Gov't tax and fee collection
Trade = Exports - Imports
GNP = GDP + Net Foreign factor income (use expenditure approach for GDP)
Net National Product (NNP) = GNP - Depreciation
Net Domestic Product (NDP) = GDP - Depreciation
National Income = GDP - Indirect Business Taxes - Depreciation - Net Foreign factor payments or Compensation of employees + Rental income + Interest income + Proprietor's income + Corporate profits
GDP Deflator:
a price index used to adjust from nominal GDP to real GDP.
Nominal GDP/Real GDP x 100
In the base year, GDP deflator is equal to 100
For years after the base year, GDP deflator is greater than 100
For years before the base year, GDP deflator is less than 100
Inflation Rate:
It measures the percentage increases in the price level over time. It offers a key indicator of the economy's health.
Deflation - a decline in the general price level
Disinflation - occurs when the inflation rate declines
Consumer Price Index (CPI):
It measures inflation by tracking the yearly price of a fixed basket of consumer goods and services. It indicates changes in price level and cost of living.
Solving inflation problems
1. Finding inflation rate using market basket data
Current year market basket value - base year market basket value / base year market basket value x 100
2. Finding inflation rate using price indexes
Current year price index - base year price index / base year price index x 100
3. Estimating inflation using the rule of 70
Rule of 70
used to calculate the number of years it will take for the price level to double at any given rate of inflation
Rule of 70 - years needed to double inflation = 70 / annual inflation rate
4. Determining real wages - real wages = nominal wages / price level x 100
5. Finding real interest rates, Real Interest Rate = nominal interest rate - inflation rate - premium
The cost of borrowing or lending money that is adjusted for inflation. Always expressed as a percentage
Nominal interest rate - unadjusted cost of borrowing or lending money
Causes of Inflation:
Anticipated inflation
Unanticipated inflation
Helped by inflation
Borrowers - debt will be repaid with cheaper dollars than those that were loaned out
Hurt by inflation
Fixed income - grant, scholarship
Savers - those who save money
Lenders/Creditors
Unemployment:
the number of unemployed / number of unemployed + number of employed x 100
4-5% is ideal unemployment rate
Not in the labor force:
Kids
Military personnel
Mentally insane
Incarcerated or in prison
Retired
Stay at home parents
Full time students
Discouraged workers
Types of unemployment:
1. Frictional - people who are "between jobs" they choose new opportunities, new choices, new lifestyles, new educational levels
2. Structural - technology changing, it is associated with a lack of skills or a declining industry
3. Seasonal - you are waiting for the right season to go to work (construction workers,, life guards)
4. Cyclical - unemployment that occurs due to a swing in the economy. Bad for individuals and societies
Full Employment:
occurs when there is no cyclical unemployment present in the economy
This is when the economy is working at its best potential
Natural rate of unemployment (NRU)
4-5% rate
Why is it bad?
1. Not enough consumption (GDP)
2. Too much poverty
3. Too much government assistance
Why is unemployment good?
1. There is less pressure to raise wages
2. There are more workers available for future expansions
Okun's Law:
for every 1% of unemployment above the NRU, causes a 2% decline in real GDP.
