Unit II

Unit II in macroeconomics is a little bit more complex than Unit I. This Unit has more equations and more math involved. I hope that my notes will help you to understand this unit and you can also use it for our next test! Here we GO!

• 4 types of Economic Systems
• Command Society aka Centrally Planned – government owns capital & land, and it controls labor
• Ex.: Cuba
• Traditional Society – 1. Habits    2. Rituals     3. Customs
  Decisions made by the elders and discourage new idea & technologies
• Ex.: tribes
• Free Market – people and firms act in their own best interest. Buyers & sellers exchange goods and services.
• Ex.: Hong Kong
• Mixed Economy – businesses are regulated by the government to protect the public’s interests
• Ex.: Canada, U.S., and Mexico
• Three Economic Questions
1. What goods and services should be produced?
2. How should these goods & services be produced?
3. Who will consume these goods & services?
• Market – it is an institution that allows buyers & sellers to trade
• Product V.S. Factor Market
• Product – the buyer is usually the consumer & the seller is a firm
• Factor (Resource) – F.O.P, the buyer is usually the firm and the seller is the factor owner.
• Household – a person or a group of people that share an income
• Gross Domestic Product (GDP) – total value of all final goods and services produced in the U.S. in a given year. Includes all production or income earned within the U.S. by U.S. and foreign producers.
• It does NOT include production outside of the U.S. even by Americans
• Gross National Product (GNP) – total value of all final goods and services produced by Americans in a year.
• Includes: production or incomes earned by Americans anywhere in the world.
• Excludes: production by non-Americans even in the U.S.

Just for comedy reasons... :)

• Formula for GDP : C + Ig + G + Xn
• C = Personal Consumption (67%)
• Purchases of finished goods and services
• Ex. you spend $7 to attend a movie.
• Ig = Gross Private Domestic Investment
• New factory equipment
• Construction of housing
• Factory equipment maintenance
• Unsold inventory of products build in a year
• Ex. A farmer purchases a new tractor.
• G = Government Spending
• Government purchases of goods and services
• Ex. Government closes school for the month of march.
• Xn = Net Export (Exports – Imports!!)
• Ex. A French company purchases a one-year membership to PartyPeople.com, a U.S. based
• Items that DO NOT count in GDP
• Used goods or second hand goods
• Gifts or transfers (gifts would be like a scholarship)
• Stocks and bonds
• Unreported business activities (waiter or waitress (cash tips))
• Illegal activities
• Financial transactions between banks
• Financial transactions between banks and businesses
• Intermediate goods (what you use to make a certain product)
• Intermediate goods (what you use to make a certain product)
• Non-market activities 
• Ex. Volunteering or baby sitting

A short video to help you understand what is counted and what is not counted in GDP.

• Expenditure approach VS Income approach
• Expenditure approach – income generated from production of goods and services
• C + Ig + G + Xn
• Income approach – we’re going to add all the income generated from the production of final output 
• W + R + I + P
• W = wages
• R = rents
• I = interests
• P = profits
• + Statistical Adjustments
• Both sides have to equal out 
• Net Domestic Product (NDP) – GDP adjusted for depreciation (aka consumption of fixed capital)
• GDP – Depreciation
• Gross National Product (GNP) - Depreciation
• Ex. something that loses value
• National Income (NI) – income earned by American owned resources whether it is here or abroad
• Net National Product (NNP)  – Indirect Business Taxes (IBT)
• CE + RI + II + CP + PI
• GDP – IBT – Depreciation  - Net foreign factor payment
• Personal Income (PI) - Income received by households regardless of the source
• Disposable Personal Income (DPI) – after tax income available for household consumption
• National Income (NI) – Household Taxes (HT) + GTP
• FORMULA FOR TRADE – exports – imports
• CE = Compensation of employee (wages), RI = rental income, II = interest income, CP = corporate profit, PI = Proprietor’s income
• Nominal GDP (NGDP) – measures GDP in current dollars no matter what the output is
• P * Q = NGDP
• Real GDP (RGDP) – measures GDP in constant dollars and is adjusted for inflation

This video explains nominal and real GDP!

• Firms – organization that produces goods and services for sale
• GDP Deflator: the measure of the level of prices of all new domestically produced final goods and services in an economy
• 
• Inflation Rate – a rise in the general level of prices

• Ex. A dollar today can buy less than it could yesterday.
• CPI – Consumer Price Index

• Deflation – A decline in the general price level.
• Disinflation – occurs when the inflation rate itself declines.
• Solving inflation problems: 2-3% inflation
• Rule of 70 – how many years will it take to double inflation.

• 
• Finding real interest rates:
• Real Interest Rate = Nominal interest rate – Inflation
• Real interest rate - the cost of borrowing or lending money that is adjusted for expected inflation. It is always expressed as a percentage!
• Nominal interest rate – it is an unadjusted cost of borrowing or lending money. It is always expressed as a percentage.
• Causes of inflation:
• Demand-pull – it is caused by an excess of demand over output that pulls prices upward
• output and employment rise while the price level is also rising
• spending increases faster than production
• 3 Sources:
1. increase in government purchases
2. excessive increases in the money supply
• create a condition called hyperinflation – a rapid rise in the inflation rate

                                              3.   rising incomes as the economy approaches full employment output

• Cost-push  (supply side economics) – caused by a rise in per unit production cost due to increasing resource cost
• 2 sources :
1. Supply shocks – dramatic rise in energy or raw material prices due to input shortages or growing demand for inputs
2. Price wage spiral – workers seek higher wages to offset higher consumer prices.
• Effects of inflation:
• Anticipated vs Unanticipated –
• Unanticipated inflation - has stronger effects because those expecting inflation may be able to adjust their work or spending habits to avoid or lessen the effects
• Wages and pensions may have cost of living adjustments (Cola) built in to offset anticipated inflation
• Fixed income group - they will be hurt because their real income suffers because their nominal income does not rise with prices.
• Savers – will be hurt by unanticipated inflation because inflation takes away from the interest earned on the account
• Borrowers – can be helped by unanticipated inflation while lenders – are hurt by unanticipated inflation because debts will be repaid with cheaper dollars than the ones that were loaned out
• GNP = GDP + Net foreign factor payment
• Net Private Domestic Investment + Depreciation = Gross Private Domestic Investment
• Unemployment: Failure to use unavailable resources
• Employed: Includes those that are self-employed
• Unemployed:
• New entrants
• Re-entrants
• Laid off
• Quit last job
• Not in the labor force:
• Armed services (military)
• Home makers (stay at home parent)
• Students
• Retirees
• Disabled people
• People in mental institutions
• In prison
•  Unemployment rate= 
• 
• Types of unemployment
• Frictional – transitional, temporary, short termed (searching for a job or in between jobs). It signals that new jobs are available and it reflects freedom of choice.
• Graduates from high school or college (looking for a job)
• People who quit or get fired
• People who are looking for a better job
• Cyclical – we have an economic downturn in the business cycle, because there is a deficient demand for goods and services. (it is caused by a recession) If you lose your job due to a recession, they do come back.
• Structural – deals with technology. A job may become obsolete due to changes in consumer’s taste
• Reasons:
• Automation
• Creative destruction – as jobs are created others are lost
• Change in skills
• Seasonal - jobs that are dependent upon the season or the weather
• Exs:
• Life guard
• Santa clause
• Easter bunny
• Construction workers (weather)
• Full Employment (FE) = natural rate of unemployment (NRU)
• It is equal to structural + frictional unemployment
• Full employment does not mean zero unemployment
• Okun’s Law
• Describes how unemployment relates to a nation’s GDP
• States that for every 1% unemployment above the NRU, a negative GDP gap of 2% will occur.
• Unequal burdens of unemployment:
1. Rates are lower for white-collar workers
2. Teenagers have the highest rates
3. Blacks have higher rates than whites
4. Rates for males and females are comparable