Formulas

• GNP: GDP + Net Foreign Factor Payment
• Gross Investment: Net investment - Depreciation
• Net National Product: GNP - Deprecation 
• Net Domestic Product: GDP - Deprecation
• Disposable Personal Income: National income - Personal taxes + govt. transfer payments
• Trade: Govt. purchases of goods and services + Transfer payments - Govt. tax and fee collection.
• Budget: Govt. purchases of goods and services + Transfer payments + Govt. tax and fee collection
• National income: Compensation employee + corporate profits + interest income + rental income + proprietors income
• GDP: Consumption + Gross private domestic + Govt. spending + Net Exports.
• Income: Wages + Rents + Interest + Profits and Proprietor income
• Rule of 70: 70 / annual rate of inflation
• Real interest rate: Nominal interest rate - Expected inflation rate. Base price x Units of output current year
• Ideal inflation rate: Current price index - base year price index / base year price index x 100
• Nominal: Price per unit x Units of Output
• Inflation: CPI current year - CPI base year x 100. New - Old / Old x 100
• Unemployment: Unemployment / Labor force (unemployment and employment) x100

Unemployment

• Labor force
• Number of people classified as employed or unemployed

• Unemployment
• Percentage of people in the labor force who wants a job but are not working.

• Employed
• Temporary leave from work, part-time employment, and one hour of each month.

• Unemployment
• Kids, full time students, retirees, military personal, stay at home moms and dads, mental institution, incarcerated people, and discourage workers
• Formula: Unemployed rate = Number of unemployed / number in labor force (unemployed and employed) x 100

• Standard unemployment rate is 4-5%
• 4 types of unemployment

1. Frictional Unemployment
1. "temporarily unemployed" or being between jobs
2. Or looking for a better job
3. High School looking for a job
2. Seasonal Unemployment 
1. Unemployment which is due to time of year and the nature of the job
2. Jobs will come back
3. Lifeguard, Santa Claus impersonator
3. Structural Unemployment
1. Changes in the structure of the labor force maybe some skills obselete.
2. Workers learn new skills to get a job.
4. Cyclical Unemployment
1. Unemployment that results from economics downturns (recessions)
2. Demand for goods and services falls demand for labor falls and workers are fired.

• Frictional + Structural = NPU (4-5%) - full employment
• Full employment means NO cyclical employment

• Okun's law
• Unemployment rises 1 percent above the natural rate, GDP falls by above 2%

 

Inflation

Purchasing Power - Amount of goods and services that money buys. Ex. $2 dollars $1 in 1986

• General rising level of prices
• It reduces the "purchasing power" of money

1. Government prints too much money (The quantity theory)
2. Demand Pull inflation  (too many dollars chasing too few goods)
1. Demand pulls up prices!!! Demand increases but supply stays the same. The result is a shortage driving prices up.
3. Cost Push inflation (higher production costs increase prices) Ex. Gas during Hurricane Katrina.

• Ideal inflation rate: 2-3% Recession: decreases 2%

Formula: current year price index - base year price index /  base year price index X 100

• The 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

• Deflation and Disinflation
• Deflation - decline in the general price level
• Disinflation - occurs when the inflation rate itself declines.

• Real interest rates
• It is the percentage increase in purchasing power that a borrower pays to the lender. (adjust for inflation)
• Formula: nominal interest rate - expected inflation

• Nominal interest rates
• Percentage increase in money that the borrower pays back to the lenders not adjusting for inflation.

Real GDP vs. Nominal GDP

• Nominal - It is the value of output produced in current prices. Can increase from year to year. If either output or price increase.
• Current prices
• Price x Quantity(output)

• Real - Value of output produced in constant base year prices. Adjusted for inflation.
• Price x Quantity(output)
• Can increase from year to year only if output increases.
• Trying to measure economic growth.

• In the base year nominal and real GDP will be equal.
• Years after the base year nominal GDP will exceed real GDP.
• Years before base year real GDP will exceed nominal GDP.
• GDP Deflator
• Price index used to adjust from nominal to real GDP
• Nominal / Real x 100
• Consumer Price Index (CPI)
• Measures inflation by tracking changes in the price of market basket of goals (get several items)
• Price of market basket in current year / Price of market basket in base year x 100

Included and Excluded GDP

• Final goods and services
• Does not include intermediate goods (inputs used to produce goods)
• Avoid doubling counting
• Used or second hand sells (includes double count)
• Gifts or transfer payments (public or private)

• Social Security, Unemployment compensation, scholarships
• Stocks and Bonds. No production.
• Unreported business transaction (Ex. tips) 
• Illegal activity (black market or underground activity)
• Non-market activity (volunteering or family work)

GDP and GNP

• Business - organization producers goods and services.
• Household - person or group of people that show income
• Represents transactions - in an economy by flows around a circle.

Gross Domestic Product (GDP)

• Total value of all final goods and services produced within a countries boarders within a given year.
•  Includes: All production and income earned within the U.S. and foreign users. It excludes production outside of U.S. even by Americans.

1. C- Consumption:67% of U.S. economy purchase of finished goods and services.
2. Ig- Gross Private Domestic Investment: Deals with factory equipment, construction of housing, unsold inventory built within that year and factory equipment maintenance. 18% of economy.
3. G- Government Spending: 17% of economy.
4. Xn- Net Exports: (exports - imports) -2% of economy.

Gross National Production (GNP)

• Total value of all final goods and services produced by Americans in a given year.
• Includes: Production or income earned by Americans anywhere in the world.
• Does not include production by non-Americans even in the U.S.

Formula
 C + Ig + G + Xn = GDP