CHAPTER 2,5,6 CIRCULAR FLOW
Types of economic systemsCommand» in a centrally planned the government decided questions of product; the government owns land and capital and controls labor EX: Cuba
Traditional» in a traditional economy it is based on rituals, habits, and customs. most decisions are made by the elders EX: tribes
Mixed» mixed economy is when government is regulating businesses to protect the public interests. EX: US, Canada, Mexico
Free market» in a free market people in firms act on their own best interest. Allows buyers and sellers to exchange goods and services
Three economic questions that every society must answer:
» what goods and services should be produced?
» how will these goods and services be produced?
» who will consume these goods and services?
Market - It is an institution or mechanism allowing buyers and sellers to make trades
»Product market - the buyer is usually a consumer and seller is a firm EX: consumers buy products
»Factor market (resource market)- factors of production: land, labor, capital, entrepreneurship. Most important factor is labor. The buyer is usually the firm and the sellers is the factor owner. EX: when firms/businesses demand resources, one company buying from another
Household - a person or a group of people that share their income
Firm -an organization that produces goods and services for sale
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CHAPTER 7
Gross domestic product - Total value of all final goods and services produced within the countries border within a given year
»GDP includes all production or income earned within the US by US and foreign producers.
»Final goods and services
»Income earned (w.r.i.p)
» interest payments on corporate bonds
»Current production of final goods
»Unsold output (business inventory)
»It excludes production outside of the US even by Americans.
»Used goods and second hand goods (gifts or transfers)
»Stocks
»securities
»Unreported business activities conducted in cash
»Illegal activities (drugs, human trafficking)
» final transactions between banks and businesses
»Intermediate goods - used in the process of final goods
» non market activities (babysitting)
C +Ig +G +Xn = GDP
C= personal consumption: purchases of finished goods and services
Ig= gross private domestic investment: factory equipment maintenance, New factory equipment, construction of housing, unsold inventory of products built in a year
G= government purchases of goods and services
Xn= Ne + experts
Exports - imports
Expenditure approach to GDP - is income is generated from the production of goods and services
C + ig + G + Xn
Income approach to GDP - is income generated from the production of final output
(W + r + I + p) + statistical adjustments
»»Gross national product (GNP)- The total value of all final goods and services produced by Americans in a year.
»It includes production or income earned by Americans anywhere in the world.
»It excludes production by non Americans even in the US
net national product (NNP)
»G n p - depreciation
Net domestic product (NDP)
»Gdp - depreciation
National income (NI)
»Income earned by American owned resources whether here is abroad
NNP - indirect business taxes (ibt)
CE (compensation of employees) + RI (rental income) +II (interest income) + CO (corporate profits) + PI (proprietors income)
GDP - IBT - depreciation - net foreign factor payment
Disposable personal income (DPI)
»after tax income available for household consumption
ni (national income) - HT (household taxes) + GTP (government transfer payments)
Nominal GDP (NGDP)
»Measures GDP in current prices regardless of the output
P x Q
real GDP (RGDP)
»Measures GDP in constant dollars. It is adjusted for inflation therefore it reverts to base year prices
GDP deflator
»It is a measure of the level of prices of all new domestically produced final goods and services
Nominal GDP / real GDP x 100
Inflation rate - a rise in the general level of prices
(Price index in year 2 [current year]- price index in year 1 [previous year]) / price index in year 1 (previous year)
CPI consumption price index -most widely used measure the overall price level in the US
=
price of the market basket in the particular year / price of the same market basket in 2000 (EX)
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CHAPTER 8 INFLATION TYPES
»Inflation - a rise in the general price level
»Deflation a decline in the general price level
»Disinflation it occurs when the inflation rate declines
Solving inflation problems
»Rule of 70 (how ma any tests will it take to double inflation)
70 / inflation rate
Inflation rate (standard rate 2 - 3%)
Unemployment 4 - 5%
[(Current year price index NEW) - (prior year price index OLD)] / (OLD)
Real interest rate - it is the cost of borrowing our lending money that is adjusted for inflation. It is expressed as a percentage
= nominal interest rate - inflation
Nominal interest rate it is the unadjusted rate of borrowing or lending money
»»Causes of inflation
»Demand pool - caused by an excess of demand over output that pulls prices upward
»Sources of demand pool:
»increases in government purchases
»excessive increases in the money supply which creates a situation of hyperinflation (rapid rise our extremely high inflation rate)
»Rise in income as the economy approaches pool employment output (as workers earn more they increase for demand of goods)
»Cause push inflation (supply side economics) - Caused by a rise in per unit production cost due to increasing resource cost
»Sources of push inflation
»Supply shocks dramatic rise in energy or raw material prices due to input shortages or growing demand for inputs
»Price wage spiral workers seek higher wages to offset rising 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 activities to avoid our lessen the effects
»Wages and pensions may have caused of living adjustments (colax) *****
»Expected inflation increases the nominal cost of borrowing while unexpected inflation reduces the real cost of borrowing
HURT
»Fixed income group (same amount every month) -will be hurt because their real income suffers; nominal income does not rise with the prices
» savers- hurt by unanticipated inflation because inflation takes away from the interest earned on the account
» lenders - cannot be helped by unanticipated inflation. Debts will be repayed with cheaper dollars than those that were loaned or
HELP
» borrowers - can be helped by unanticipated inflation. Debts will be repayed with cheaper dollars than those that were loaned or
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UNEMPLOYMENT
Unemployment - failure to use available resources
Unemployed:
»New entrants
»re Entrants
»Laid off
»Lost their jobs
»Quit their jobs
Employed - includes those that are self employed
Not in the labor force:
»Armed forces
»Home makers
»Students
»Retirees
»Disabled people
»Discourage workers
»Those that are in prison
»Those that are in mental institutions
Unemployment rate
[Number of unemployed / total labor force (number of unemployed + number of employed)] x 100
»»four types of unemployment
1. Frictional - it is temporary, transitional, short termed (in between and they're searching for a job) EX: graduates, people who get fired or quit their jobs.
It signals that new jobs are available.
2. Cyclical - it is caused by the recession phase of the business cycle. There is deficient demand for goods and services.
3. Structural - technological or long termed. It is due to automation (due to consumer taste jobs may become obsolete), due to creative destruction (as new jobs are created, others are lost)
4. Seasonal - weather related or seasonal jobs EX: construction, Santa Claus, Easter bunny, life guard, school bus drivers
»»full employment FE
»Natural rate of unemployment (NRU)
»It is equal to structural and frictional unemployment
»Full employment does not mean 0 employment
»»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
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