Unemployement

Unemployment : Failure to use available resources, particularly labor, to produce desired goods and services

Unemployment Rate:  Standard 4%  to 5%
Formula:                      number of unemployed             
                   number of employed + number of unemployed


Types of Unemployment

Frictional Unemployment: Temporarily unemployed or between jobs

Structural Unemployment: Workers do not have transferable skills and their jobs will never come back

Seasonal Unemployment: Unemployed due to time of year and nature of job

Cyclical Unemployment: Unemployment from Economic downturn. As demand for goods and services fall, demand for labor fall.

Okun's Law

For every 1% that actual unemployment rate exceeds the natural rate of unemployment, a GDP gap of about 2% occurs

Calculating Okun's Law

Labor Force

1. Above 16 years of age

2. Able and willing to work

Not in Labor Force

1. Military

2. People in jail/ prison

3. People in mental institution

4. Retired

5. Under 16 / students

6. Homemakers

7. People not looking for a job

Rule of 70
Used to determine how many years it takes for a value to double given a particular annual growth rate
ex: If you put $20,000 in the bank and it earns a yearly interest rate of 7% then how many years will it take for income to double.

answer : Take 70 and divide it by interest rate
70/7 = 10 years.

Real GDP and Nominal GDP

Real GDP
  - Value of output produced in constant base yea prices
  - It can increase only if quantity increases
  -Used to measure Economic growth

Nominal GDP
  - Value of output produced in current prices
  - It can increase from year to year if price and quantity increase
  - Used to measure price increases (INFLATION)


nominal vs real gdp

Nominal vs Real GDP

Formula for Real GDP and Nominal GDP is
P x Q
If base year is not given then use earliest year given

GDP Gap : The amount by which actual GDP falls short of Potential GDP

Calculating GDP Gap

GDP Deflator : Price index used to adjust from Nominal to Real GDP
          formula :                 Nominal GDP
                                             Real GDP      x 100
Consumer Price Index (CPI) : Most commonly used measurement of inflation for consumers
          formula :                  Current year
                                             Base year     x 100

Inflation formula:  GDP Deflator of current year - GDP Deflator if base year
                                                      GDP Deflator of base year                            x 100
In base year GDP deflator  = 100
 For years after base year GDP deflator > 100
  
Calculating Consumer Price Index

Caluclating GDP Deflator

calculating real GDP using a deflator


Interest: Tax on money that is borrowed
    Formula :       Real Interest Rate = Nominal Interest Rate - Inflation

Inflation
   - Taxes those who receive relatively fixed income
                 ie: welfare, social security

 Hurt By Inflation                                Vs                       Helped By Inflation
  1. Lenders                                                                           1.Debtors                                        
  2. Fixed income                                                                  2. Businesses where price of product
  3. Savers                                                                               increases faster than price of resources

Calculating rate of Inflation



Cost Of Living Adjustments (COLA) : Adjustment on pay to supplement income

Circular Flow

Circular Diagrams represent transitions in an economy
      Has 2 Markets:

1. Resource or Products Market- Place where households sell resources and businesses buy resources ( ALWAYS have goods and services flowing through)
2. Factor Market- Factors of productions/ firms                                                                             IE: land, labor, capitol entrepreneurship

Firms- Organizations that produces goods and serviced for sale. They sell finished products to households.

Household- Person or a group of people that share their income. They sell their factors of production to businesses.

Circular Flow

GDP

GDP (Gross Domestic Product) is the market value of all final goods and services produced within a country's borders within a given year.

GNP( Gross National Product) is the total market value of all final goods and services produced by citizens of that country on its land or foreign land.

What's included in GDP
C- Personal Consumption expenditures
          *DOES NOT INCLUDE HOUSING*
Ig- Gross private domestic investment
                               This includes:

• Factory Equipment
• Factory Equipment maintenance
• Construction of housing
• Unsold Inventory of products  built in a year

G- Government Spending

• Goods and Services

Xn- Net Exports

• Exports- Imports

What's not included in GDP

1. Intermediate goods: These are goods that require further processing before they are ready for final use.
   EX: Car engine, Radiator, Mirrors...etc 
2. Used/ Second hand goods: These are goods that have already been counted in previous year so they are excluded to avoid double counting.
3. Purely Financial Transactions ( Stocks and Bonds): They are excluded because they are not durable, countable goods and the return from the exchange may not be seen during that year.
4. Illegal Activities ( drugs)
5. Unreported Business Activities: They are not reported by people and cannot be tracked.        EX: Unreported tips
6. Transfer Payments: These are Public (payments like ISS, Welfare, or Veterans payments) or Private (Scholarships or college funds)
7. Non - Market Activity: These are volunteer activities, babysitting, or any work that may not result in payment.

Two Ways of Calculating GDP

Expenditure Approach: Add up all spending of final goods and services produced by the end of the year.

                   Formula: GDP= C+Ig+G=Xn

Income Approach: Add up all income that resulted from selling all final goods and services produced in a given year.

                    Formula: GDP= W+R+I+P+Statistical adjustments

W= wages

R= rents

I= Interest

P= Profits

Statistical Adjustments= Profits

Expenditure approach has to equal the Income approach

Compensation of Employees: This includes wages, salaries, fringe benefits, social security contributions and heath and pension plans.

Interest: Income of Property owners

Corporate Profits: Income of company stockholders

Proprietors Income: Income of sole proprietors (Entrepreneurs) and partnerships

Statistical Adjustments:

1. Indirect Business Taxes
2. Depreciation
3. Net Foreign Factor Payments.

What is GDP

How to Calculate GDP

Net Domestic Product (NDP)
      *GDP- Depreciation*
Net National Product
      * GNP- Depreciation*

GNP=GDP + Net Foreign Factor Payment


Budget Surplus/ Deficit
Government purchases of goods and services + Government transfer payments - Government tax and fee collections

Trade Surplus / Deficit
Exports - Imports

National Income
 1. Compensation of Employees + Rental Income + Interest income + Corporate Profits + Proprietors Income
 2. GDP - Indirect Business Taxes - Depreciation - Net Foreign Factor Payments

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

Business Cycle

Business Cycles occur all the time

• once cycle is from trough to trough
• Average cycle is 5 to 7 years
• Recessions last about 14 months
• Peaks: troughs are meaningless because we never know until it is over
• Trough means end of recessions
• If recession loses more than 10% of real GDP then it is a depression

Peak is the highest point of real GDP. It has the greatest spending and lowest unemployment. In this phase inflation is a problem.

Expansion- Real GDP is increasing.

Spending increases at this point and unemployment decreases

Contraction/Recession is when real GDP declines for 6 months. Unemployment increases and spending declines.

Trough is the lowest point of real GDP. It has the highest unemployment and the least spending.

Business Cycle

Price Ceiling and Price Floor

Price Ceiling occurs when the government puts a legal limit on how high the price of a product can be. Price Ceiling is only effective if it is set below equilibrium.

                                                        * Creates a shortage*

Ex: Rent Control

Price Floor is the lowest legal price a commodity can be sold at.  They are used by the government to prevent prices from being too low.

                                                        *Creates a surplus*

Ex: Minimum Wage

Equilibrium is the point at which the supply curve and the demand curve intersect. All resources are being used at this point.

Excess Demand occurs when the quantity demanded is greater than the quantity supplied.

                                                        *Creates a shortage*

Excess Supply Occurs when the quantity supplied is greater than the quantity demanded.

                                                         *Creates Surplus*

Price Ceiling + Price Floor

Prie Floor and Price Ceiling

Demand and Supply

Demand - Quantities that people are willing and able to buy at various quantities
Law of Demand - There is an inverse relationship between price and quantity demanded

What Causes a "change in quantity demanded"?
            - Change in Price
What Causes a " change in demand"?

1. Change in Buyer's Taste ( Advertisement)
2. Change in number of buyers (Population)
3. Change in price of related goods

• Complimentary Goods
• Substitute Goods

     4.   Change in Income

• Normal Good- Increase in income that causes an increase in demand

                     (Can be Vice Versa)

• Inferior Good- Increase in income causes fall in demand

                      (Can be Vice Versa)

Elasticity of Demand

- Measure of how consumers react to a change in price

1. Elastic Demand

• Demand that is very sensitive to a change in Price

                           E >1

• Product is not a necessity and there are available substitutes
• Ex: Soda, T-Bone Steaks, Car

     2.  Inelastic Demand

• Demand that is not very sensitive to a change in price

                          E < 1

• Product is a necessity and there are a few substitutes. People will buy no matter what.
• Ex: Gas, Medicine, Salt, Soap, Milk

    3.  Unitary Demand

                         E = 1

HOW TO CALCULATE PRICE ELASTICITY OF DEMAND (PED)

          - 3 STEPS PED

1. Calculate the quantity

          ( New Quantity- Old Quantity) / Old Quantity

      2. Calculate Price

           ( New Price- Old Price) / Old Price

      3. PED

           PED = (% of change in quantity demanded) / (% of change in price)

   How to calculate PED

Supply

Supply - The quantities that producers or sellers are wiling and able to produce at various prices

Law of Supply - There is a direct relationship between price and quantity supplied

What Causes a "Change in quantity supplied"?

                                  - Change in price

What causes a "Change in supply"?

1. Change in expectations
2. Change in Weather
3. Change in # of suppliers
4. Change in cost of production
5. Change in taxes or subsidies ( $ government gives to producers)
6. Change in technology

Decreasing = Shift to the left

Increasing = Shift to the right

Supply shifts to the Left

1. Cost of Production Increases
2. Technology is down
3. Taxes Increase
4. Subsidies down/ taken away
5. # of Sellers decrease
6. Weather is bad

Supply shifts to the Right

1. Cost of Production decreases
2. Technology increases
3. Taxes lowered
4. Subsidies increase
5. # of sellers increase
6. Weather is good

Total Revenue (TR) - Total amount of money a firm receives from selling goods and services

• Formula: P x Q = TR

Fixed Cost - A cost that does not change no matter how much of a good is produced

               ex: Mortgage, Rent, Insurance, Salary

Variable Cost - A cost that does not change no matter how much of a good is produced

               ex: Electricity Bill

Marginal Cost - Cost of producing one more unit of a good

*Different than Marginal Revenue*

Calculating Total Revenue

Supply and Demand

Basic Understanding of Supply and demand