UNIT 2

Day 7:
Circular Flow Model- represents the flow of money,goods, and services in our economy.

•      Factor Market(Resource Market)- Land, Labor, Capital, and Entrepreneurship. We sell our resources to the businesses
• Factor Market(Goods Market)- Goods and services are bought and sold.

Household- person or group share income

Firm- Organization that produces goods and services for sell.

Day 8:

GDP- Gross Domestic Product- Total value of all final goods and services produced within a countries border within a given year.

GNP- Gross National Product- Total value of all final goods and services produced by Americans in a given year.

Included and Excluded in GDP

Included-

1. Final Goods and Services
2. Income Earned
3. Interests payment on corporate bonds
4. Current production of final goods and services
5. Unsold Output( business Inventories)

Not Included

1. Intermediate goods
2. Transferred payments( public or private )
3. Purchases of stocks and bonds
4. Used or second-hand goods
5. Non-market Transactions
1. Babysitting
2. illegal drugs
3. doing own housewor

Day 9:

How to Calculate GDP

Expenditure Approach

GDP=C + Ig + G + Xn

C- Personal Consumption

Ig- Gross Private domestic Investment

G- Government Spending

Xn- Net Exports ( Exports- Imports )

Income Approach

GDP=W + R + I + P + Statistical Adjustments

W- Wages( salary, compensation of employees)

R- Rents Income

I- Interest Income

P- Proprietors Income

Budget Deficit Income- Total Amount of govt borrows within a year

(Transfer Payments + Government purchases of goods and services ) - (Government tax and Fee Collection)

DPI- National Income - Household Taxes + Government Transfer

Depreciation- Consumption of fixed capital

Day 10:

Nominal vs Real GDP

Nominal GDP- value of output produced in current prices. P*Q=Nominal GDP

Real GDP- Value of output produced in constant or base year prices. P*Q= Real GDP

Nominal can increase year to year if either output or prices increase

Real GDP can only increase if output increases.

• economic growth(Real GDP)
• Inflation(Nominal GDP)

GDP Deflator= Nominal/Real *100

In base year GDP deflator stays 100

For year after base year GDP deflator is greater than 100

For year before the base year GDP deflator less than 100

Day 11:

Consumer Price Index(CPI)- measures the cost of the market basket of goods or a typical urban american family

Real GDP is adjusted for inflation

Inflation- General rise of the price level

Deflation- Fall of price level

Rate of Inflation 

P0- New Year

P1- Base Year

Day 12:

Types of Inflation

1. Cost-push inflation- higher production cost which increase prices, supply shock

2. Demand-pull inflation- Too many $, chasing too few goods. shortage driving prices. overheated economy with excessive spending and same amount of goods.

3. Political Panics- Caused by depression or recession.

How Inflation Helps/ Hurts

Hurt

1. Lenders(Loan Money @fixed rate)
2. People with fixed income(Elderly)
3. Savers( People saving money)
4. People with fixed wage(people at McDonalds)

Help

1. Debtors(Those who owe money)
2. Business where price of product increases faster than price of resources.

Day 12:

Unemployment- percentage of people who do not have jobs but they are in the labor force.

Labor Force- unemployed + employed

Not in the labor force-

• Kids(16 and younger)
• Mentally "insane"
• Stay at home moms and dads
• Retired people
• military personal
• people locked up in prison
• full time students
• Discourage( No one wants to hire these people)

Employed vs Unemployed

Employed- people 16 and older with a job

Unemployed- people 16 or older who have actively looked for a job for 2 weeks

Labor force= Employed + Unemployed

Types of Unemployment

Seasonal - Mall Santa

Frictional- between jobs

Structural- associated with lack of skill or declining industry. Update in technology

Cyclical- Associated with business cycle.

• it is bad for society
• usually during a recession

Full Employment- Occurs when there is no cyclical unemployment in the economy.

NRU- Natural Rate of Unemployment- 4% to 5%

Okuns Law- For 1% of unemployment above the NRU, causes a 2% of decline in RGDP( Real GDP )