Unit 2: Unemployment 2/9/17

Unemployment: % of people in the labor force who want a job but are not working.

Labor Force: Consists of unemployed and the employed.

Employed:

• Work at least 1 hour a month
• Temporarily absent from work
• Part time workers

Not in the Labor Force:

• Kids
• Full time students
• People in mental institutions
• People who are incarcerated
• Retirees
• Stay at home parents
• Military personnel
• Discouraged

Unemployment Rate Formula:

Number of unemployed      X 100

     Total Labor Force

Standard unemployment = 4-5%

Types of unemployment:

• Frictional Unemployment: Temporarily unemployed. Qualified w/transferable skills but they aren't working
• Seasonal Unemployment: This is a specific type of frictional unemployment, which is due to time of year and the nature of the job. These jobs will come back.
• Structural Unemployment: Changes in the structure of the labor force make some skills obsolete. Workers DON'T have transferable skills & these jobs will never come back. Workers must learn new skills. The permanent loss of these jobs is called "creative destruction".
• Cyclical Unemployment: Results from economic downturns (recession). As demand for goods & services falls demand for labor falls and workers are fired.  

• ⅔ of unemployment are unavoidable: Frictional, Structural
• Together they make the NRU (natural rate of unemployment)
• We are at full employment if we only have 4–5% unemployment(NRU)
• Full employment means NO cynical unemployment.
• Okun’s law: When unemployment rises 1% above natural rate, GDP falls by about 2%

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Unit 2: Inflation 2/6/17

Inflation: General rising level of prices

- Reduces Purchasing Power of money

Purchasing Power: The amount of goods & services that money buys

Deflation: A decline in the general price level

Disinflation: Occurs when the inflation rate itself declines

Three Causes of Inflation:

1) Printing too much money
2) Demand-Pull Inflation:
"Too many dollars chasing two few goods"

• Demand pulls up prices!
• Demand increases but supply stays the same. The result is a shortage driving up prices
• An overheated economy with excessive spending but same amount of goods.

3) Cost-Push Inflation

• Higher production costs increases prices

Inflation Formula:

Current Year Price Index - Base Year Price Index     X 100

              Base Year Price Index

Hurt by Inflation:

• Lenders- people who lend money (at fixed interest rates)
• People with fixed incomes
• Savers

Helped by Inflation:

• Borrowers- people who borrower money
• A business where the price of the product increases faster than the price of resources

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.

Formula =              70                   

                Annual Rate of Inflation

Real Interest Rate: Deals with the amount of money that is borrowed. Adjusted for inflation.

 Real= Nominal Interest Rate - Expected Inflation

Nominal Interest Rate: The percentage increases in money that the borrower pays back to the leader not adjusting for inflation.

Ideal Interest Rate: 2 to 3%

Unit 2: Real GDP & Nominal GDP 2/3/17

Nominal GDP: The value of output produced in current year prices.
-Can increase from year to year if either output or prices increase.
Formula: Price X Quantity <= Output

Real GDP: The value of output produced in constant based year prices. Adjusted for inflation.
-Can increase from year to year if only output increases.
Formula: Price X Quantity

• In the base year the current price will always be equal to the constant price (nominal & real GDP will be the same)
• In years after the base year, Nominal GDP will exceed Real GDP 
• In the years before the base year, Real GDP will exceed Nominal GDP

GDP Deflator: A price index used to adjust from Nominal to Real GDP

Formula: Nominal GDP        X 100

                Real GDP

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

Consumer Price Index (CPI): Measures inflation by tracking changes in the price of a market basket of goods.

Formula: Price of Market Basket in current year   X 100

                Price of Market Basket in base year

Unit 2: GDP Cont. 1/31/17

Expenditure Approach to GDP:
C + Ig + G + Xn-(Net Exports-Imports)

Income Approach to GDP:

W- wages (compensation of employees/salaries)
+
R- rents (income received by the households & business that supply properly resources)
+
I- interest (money paid by private businesses to the suppliers of  loans used to purchase capital)
+
P- profits (owning your own business)
+
Statistical Adjustments (Dividends, Corp income tax, Net foreign)

Trade: exports - imports
Budget= Government purchases of goods & services + Government Transfer Payments - Government Tax & Fee Collection


National Income:
1) Compensation of Employees + Rental Income + Interest Income + Proprietors Income + Corporate Profits
2) GDP - Indirect Business Taxes - Depreciation - Net Foreign Factor Payment


Disposable Personal Income: National Income - Personal Household Taxes + Government Transfer Payments

Net Domestic Product:
GDP - Depreciation

Net National Product:
GNP - Depreciation

Depreciation (Consumption of Fixed Capital): The loss of value in capital equipment due to normal wear & tear.

Gross Investment:
Net Investment + Depreciation