Unit 2 - Unemployment

• Unemployment - the failure to use available resources, particularly labor, to produce desired goods and services
• Population - the total amount of people in a country
• Labor Force - # of people in a country that is employed or unemployed

Types of Employment

• Employed
• people who are 16 years old of age or older who have a job
• employed = if you work at least 1 hour every 2 weeks
• Unemployed
• people who are 16 years of age or older that do not have a job, but they are actively searching for a job within the last 2 weeks
• Not in the Labor Force
• kids
• full-time students
• retirees
• disabled people
• homemakers
• mentally institutionalized people
• incarcerated
• military
• discouraged workers

Unemployment Rate

• (# of unemployed) / (total labor force) x 100

Types of Unemployment

• Frictional Unemployment
• to be temporarily unemployed of "in-between" jobs
• the workers are qualified and have transferable skills
• ex: high school & college graduates, people looking for a better opportunity
• Seasonal Unemployment
• due to the time of the year and the nature of the job
• ex: life guards, construction workers, mall Santa Claus, Easter bunny, school bus driver
• Structural Unemployment
• changes in the structure of the labor force, which make some skills obsolete
• workers do not have transferable skills
• ex: VCR repairman, typewriter repairmen
• creative destruction - when a new job is created, an old job is destroyed
• Cyclical Unemployment
• unemployment that results from economic downturns such as recessions
• as demand for goods and services falls, demand for labor falls and workers will be laid off

Full Employment/NRU (Natural Rate of Unemployment)

• NRU = Frictional Unemployment + Structural Unemployment
• Full Employment = there is no cyclical employment

• Okun's Law - for every 1% in which the actual unemployment rate exceeds the natural rate of unemployment, it causes a 2% decline in real GDP

• Rule of 70 - calculates the # of years that is required to double GDP
• If annual inflation rate is 2%, how long will it take for GDP to double?
• 70/2 = 35 years

Unit 2 - Inflation

Inflation - a general rise in the price level

• Inflation reduced the purchasing power of the money
• When inflation occurs, each dollar of the income will buy fewer goods than ever before
• Causes of inflation:
1. the government prints too much money
2. demand pull inflation
• too many dollars chasing too few goods
• demand pulls up prices
3. cost-push inflation
• high production cost that increases prices
• Unanticipated inflation
• Hurt by inflation:
1. lenders/creditors (fixed rate)
2. people on a fixed income
3. savers
• Helped by inflation:
1. borrowers/debtors
2. a business where the price of the product increases faster than the price of resources
3. flexible income people
• Unaffected/uncertain by inflation:
1. ARM (adjustable rate mortgage)
2. people who have a salary/pension/social security that receive a COLA (cost of living adjustment)
• Nominal interest rate - unadjusted cost of borrowing or lending money
• Real interest rate - cost of borrowing or lending money which is adjusted for inflation
• formula: (normal interest rate) - (inflation)

Unit 2 - GDP

GDP

• Gross Domestic Product (GDP) - the total market value of all final goods and services produced within a country's borders within a given year
• Gross National Product (GNP) - a measure of what its citizens produce and whether they produce these items within its borders
• What's NOT Included in GDP
1. Used or "Second-Hand" Products
• avoid double or multiple counting
2. Gifts/Transfer Payments (public or private)
• no output being produced
• public ex: welfare, social security
• private ex: scholarship
• recipients  contribute nothing to current production
3. Stocks & Bonds
• purely financial transaction
• no output being produced
4. Unreported Business Activities
• "tips"
5. Illegal Activities
• drugs, prostitution, etc...
6. Intermediate Goods
• goods that require further processing before they are ready for final use
• ex: big mac, car
7. Non-Market Activities
• volunteer/family work

Calculating GDP

• both approaches should yield the same amount
• expenditure = income

Expenditure Approach

• adds up all the spendings on goods and services produced in a given year

GDP = C + Ig + G + Xn  

• C - the personal consumption expenditures (67 % of the economy)
• the purchase of finished goods and services
• Ig - gross private domestic investment
1. covers new factory equipment
2. factory equipment maintenance
3. construction of housing
4. unsold inventory of products built in a year
• G - government spending
• Xn - net exports
• (exports - imports)

Income Approach

• adds up all the income that resulted from selling all final goods and services produced in a given year

GDP = WRIP + Statistical Adjustments

• W - wages (salary, salary supplements, compensation of employees)
• R - rents (rental income)
• I - interests (interests income)
• P - profits (proprietors income)

Formulas

1. Trade
• (export - import)
• [-] = deficit
• [+] = surplus
2. Budget
• (govt purchases of goods & services) + (govt transfer payments) - (govt tax & fee collections)
• [-] = surplus
• [+] = deficit
3. National Income
• Option 1: (compensation of employees) + (rental income) + (interests income) + (proprietors income) + (corporate profits)
• Option 2: (GDP) - (indirect business taxes) - (depreciation *consumption of fixed capital*) - (net foreign factor payments)
4. Disposable Personal Income
• (national income) - (personal household taxes) + (govt transfer payments)
5. Net National Product
• (GNP) - (depreciation)
6. Net Domestic Product
• (GDP) - (depreciation)
7. GNP
• (GDP) + (net foreign factor payment)
8. Gross Private Domestic Investment
• (net private domestic investment) + (depreciation)

Nominal vs. Real GDP

• Nominal GDP - the value of output produced in current prices
• formula: P x Q
• can increase from year to year if either output or price increases
• Real GDP - the value of output produced in constant base-year prices that is adjusted for inflation
• formula: P x Q
• can increase from year to year if any output increases

• in the base-year, the current price is equal to constant prices
• base year → Nominal GDP = Real GDP
• in years after the base-year, nominal GDP will exceed real GDP
• in years before the base-year, real GDP will exceed nominal GDP

• GDP Deflator - a price index used to adjust from nominal to real GDP
• (nominal GDP / real GDP) x 100
• in the base-year, the GDP deflator will equal 100
• for years after the base-year, GDP deflator will be greater than 100
• for years before the base-year, the GDP deflator will be less than 100

• Inflation - a general rise in the price level
• Inflation Rate = (new price index - old price index) / (old price index) x 100
• Consumer Price Index (CPI) - measures the cost of a market basket of goods of a typical urban American family
• (cost of a market basket of goods in a given year) / (cost of a market basket of goods in the base-year) x 100

Unit 2 - Circular Flow

Circular Flow

• Government is both a producer and consumer in both markets
• Household - a person or a group of people who share an income
• Firm/Business - an organization that produces goods and services for sale
• Factor (Resource) Market - the market in which factors of production are bought by firms and sold by households
• Product Market - where goods and services are bought and sold

Factor Payments

• [W]illy - wages (labor)
• [R]est - rent (land)
• [I]n - interests (capital)
• [P]eace - profits (entrepreneurship)

Unit 1 - Business Cycles

• fluctuations in economic activity that an economy experiences over a period of time
• Expansion - a period of economic upturn when output and input (employment) are rising
• Peak - highest point; where business activity has reached a temporary maximum; it is near or at full-employment
• Contraction/Recession - a period of decline in total amount of output, income, and employment
• Trough - our lowest point; point in which economy turns from recession to depression

Unit 1 - Supply & Demand

Elasticity of Demand

• the measure of how consumers react to a change in price
• Inelastic Demand
• demand will not Δ or will Δ very little regardless of price
• "needs"
• few to no substitutes
• ex: water, milk, soap, insulin, gas
• E < 1
• Elastic Demand
• demand will Δ greatly if there is a Δ in price
• "wants"
• there are substitutes
• ex: soda, steak, fur coat
• E > 1
• Unitary Elastic
• E = 1
• "perfect economy"

Calculating Demand

• Step 1: Quantity
• (new − old) / old
• Step 2: Price
• (new − old) / old
• Step 3: PED (price elasticity of demand)
• (% Δ in quantity) / (% Δ in price)

Supply

• Total revenue - P x Q
• Fixed Cost - cost that doesn't change no matter how much of a good is being produced
• ex: insurance, salary
• Variable Cost - a cost that rises or falls depending upon how much is produced
• ex: electricity
• Marginal Cost - the cost of producing one more unit of good
• Revenue - income
• Cost - spendings

Equations

• Q - Quantity
• TFC - Total Fixed Cost
• TVC - Total Variable Cost
• TC - Total Cost
• MC - Marginal Cost
• AFC - Average Fixed Cost
• AVC - Average Variable Cost
• ATC - Average Total Cost

• AFC x Q = TFC
• AVC x Q = TVC
• ATC x Q = TC
• TFC + TVC = TC
• AFC + AVC = ATC
• TFC / Q = AFC
• TVC / Q = AVC
• TC / Q = ATC
• new TC - old TC = MC
• (Δ TC) / (Δ Q) = MC

Supply & Demand

• Price Ceiling - the legal maximum price meant to help buyers
• ex: rent control
• consequences when price ceilings are set too low:
• lower prices for some consumers
• shortages
• long lines for some buyers
• illegal sales above the equilibrium price

• Price Floor - the legal minimum price meant to help sellers
• to keep the product price from falling
• ex: minimum wage
• consequences:
• higher product prices
• surplus
• higher taxes
• waste