- It represents the flow of money, goods, and services in an economy.
- Factor Market (Resource)- (FOP), we sell our resources to businesses
- Product Market (Goods)- where goods and services ore bought and sold
- Household- person or group that shares an income
- Firm- organization that produces goods or services for sale
GDP
- Gross Domestic Product; the total value of all final goods and services produces within a countries borders within a given year
- Included:
- final goods and services
- income earned
- interest payments on corporate bonds
- current production of final goods and services
- unsold output (business inventories)
- Excluded:
- intermediate goods
- transfer payments (public/private)
- Ex: scholarship, SS
- purchases of stocks and bonds (financial transactions)
- used or secondhand sales
- non-market transactions
- ex:
- illegal drugs, prostitution
- baby sitting
- own housework or repairs
- growing own products for person consumption
GNP
- Gross National Product; total value of all final goods and services produces be Americans within a given year
Calculations
- GDP:
- Expenditure Approach: C + Ig + G + Xn
- C- personal consumption
- Ig- Gross private domestic investment
- G- government spending
- Xn- Net Exports
- Income Approach: W + R + I + P + Statistical Adjustments
- F.O.P
- W- wages, i.e salaries, compensation of employees
- R- rent, rental income
- I- interest income
- P- payments. Proprietors income
- Budget Deficit
- Total amount that the gov. borrows within a year (total gov. spending exceed tax and fee revenue)
- transfer payments + gov. purchases of goods and services - Gov. tax and fee collection
- Trade
- Exports - imports
- National Income
- Approach #1:
- Compensation of employees + proprietors income + interests income + rental income + corporate income
- Approach # 2:
- GDP - Indirect business taxes - depreciation - net foreign factor
- Disposable Personal Income
- national income - Household taxes + Gov. Transfer Payments
- Net Domestic Product
- GDP - depreciation (consumption of fixed income)
- Net National Product
- GNP - depreciation
- GNP
- GDP + Net Foreign Factor Payment
Nominal GDP
- The value of output produces in current prices (can increase year to year if either output or price increase
- Inflation
- P * Q
Real GDP
- Value of output produced in constant or base year prices
- can only increase if output increases
- Economic Growth
- Original Price * Q
Consumer Price Index
- measures the cost of the market basket of goods of a typical urban American family
- (Cost of market basket in a given year)/(cost of market basket in a base year) * 100
- Real GDP is adjusted for inflation
Deflation - fall of the price level
Rate of Inflation
- (CPI2 - CPI1)/CPI1 * 100
Deflator- NGDP/RGDP * 100
Types of Inflation
- Cost-push inflation - higher production costs which increase prices, usually result of a supply shock (push cost on you)
- Demand-pull inflation - too many dollars chasing too few goods; shortage driving up prices, overheated economy w/ excessive spending w/ same amount of goods
- Political Politics - depression/ recession
How Inflation Hurts/Helps
- Hurts
- lenders- b/c they loan $ at a fixed rate
- people with a fixed income (SS or transfer payments)(elderly)
- people who work for a fixed wage
- Helps
- debtors
- business where price of the product increases faster than the price of resources
Unemployment
- % of people w/o jobs
Labor force- employed + unemployed
Not in the labor force- 16 or younger; military personel; mentally insane; jail mates; stay at home mom/dads; full time students; retires; discouraged 16+ years olds who have searched for a job for 2 weeks
How To Calculate Unemployment Rate
- (# of unemployed)/(total labor force) * 100
4 Types of Unemployment
- Seasonal- lifeguard/ Santa worker, etc.
- Frictional- between jobs, quit before you get the other jobs
- Structural- lack of skill/declining industry
- Cynical- bad for society and individuals (you have a recession)
Full Employment - occurs when there is no cynical unemployment present in the economy
Okun's Law - for every one % of unemployment above the NRU occurs a 2% decline in real GDP
