Unit II

• Circular Flow Model
• it is represents the flow of money, goods, and services in an economy

-Factor Market (resources): we sell our resources to business
-Product Market (goods): goods and services are bought and sold
-Households: where a person or group shares an income
-Firm: an organization that produces goods and services for sale

• 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 American's in a given year
• GDP Includes

-Final goods and services

-Income earned

-Interest payments on corporate bond

-Current production of final goods and services

-Unsold output (business inventories)

• GDP Excluded

-Intermediate goods

-Transfer payments (public on private)

-Purchases of stocks and bonds

-Used goods or second handed sales

-Non-market transactions (illegal drugs, prostitution, own house work or repairs, babysitting, growing your own product for personal consumption)

• Expenditure Approach 

C: Personal Consumption

Ig: Gross Private Domestic Investment (factor equipment, construction on homes and businesses tools and machines)

G: Government spending

Xn: Net exports (export - imports)

• Income Approach 

R: Rent (rental income)

I: Interest (interest income)

P: Proprietors income

SA: Statistical Adjustment

W: Wages (salaries, compensation of employees)

• Budget Deficit: total amount the government borrows in a year

-Total government spending exceed tax and fee revenue

Budget= (transfer payment)+(government purchase of goods and services)-(government tax and fee collection)

-Budget deficit: positive

-Budget surplus: negative

• Trade

Trade=(exports)-(imports)

-Trade deficit: negative

-Trade surplus: positive

• National Income

National Income=(compensation of employees)+(proprietors income)+(rental income)+(interest income)+(corporate profits)

National Income=(GDP)-(indirect business taxes)-(depreciation)-(net foreign factor)

• Disposable Personal Income 

Disposable Personal Income=(national income)-(household taxes)+(government transfer payments)

• Net Domestic Product (NDP)

NDP=(GDP)-(depreciation)

-Depreciation (consumption of fixed capitol)

• Net National Product (NNP)

NNP=(GNP)-(depreciation)

• GNP

GNP=(GDP)+(foreign factor payment)

• Real GDP vs. Nominal GDP
• Real GDP (Economic Growth)

-Value of output produces in constant or based year prices
-Can only increase if output increases
Real GDP= (p)(q)

• Nominal GDP (Inflation)

-Value of output produced in current prices
-Can increase year to year if either output or prices increase
Nominal GDP= (p)(q)

• This video might help you calculate Real GDP and Nominal GDP!

• GDP Deflator

-In base year GDP is always equal to 100, for years after the base GDP deflator is greater than a 100
-For years before base year GDP deflator is less than 100

• Consumer Price Index (CPI)

-Measures the cost of the market basket of goods of a typical urban American family

• Real GDP is adjusted for inflation
• Inflation vs. Deflation

-Inflation: general rise in the price level
-Deflation: fall of the price level

• Rate of Inflation

• Types of Inflation

1. Cost-Push Inflation: higher production cost which increases prices, usually the result of supply shock
2. Demand-Pull Inflation: too many dollars too few goods, a shortage that is driving up the prices, overheated economy with excessive spending with the same amount of goods
3. Political Panics: depression or recession 

• How Inflation Hurts/Helps

-Hurts:

1. Lenders (loan money at fixed rate)
2. People with fixed income
3. Savers
4. People with fixed wages

-Helps: 

1. Debtors
2. Businesses where the prices of a product increases faster than the price of resources

• Unemployment: percentage of people that do not have jobs but they are in the labor force
• Labor Force: employed and unemployed not in the labor force

-Kids 16 and younger

-Military personal

-Mentally insane

-Locked in prison

-Stay at home moms and dads

-Full time students

-Retired people

-The discouraged

• Employed vs. Unemployed

-Employed: 16 and older that have a job

-People 16 and older that have actively looked for a job for two weeks

Labor Force=(employed)+(unemployed)

• Types of Unemployment

1. Seasonal (ex: lifeguards, school bus drivers)
2. Frictional: between jobs (ex: McDonald's to University )
3. Structural: associated with lack of skill or declining industry (ex: NASA closed, technology update)
4. Cyclical: bad for society and individuals, have a recession

• Full Employment (FE)

-It occurs when there is no cyclical unemployment present in the economy
-NRU (Natural Rate of Unemployment) : 4 to 5 %

• Okun's Law 

-For every 1% of unemployment above NRU causes a 2% decline in real GDP