February 09, 2017

Unemployment rate

• Percent of people in the labor force who want a job but are not working
• Formula: (# of unemployed/# in labor force)*100

Labor force

• Number of people in a country that are classified as either employed or unemployed

Employed

• Anyone who works at least one hour a month
• Anyone considered temporarily absent from work
• Part time workers

Not in labor force

• Kids
• Full time students
• People in mental institutions
• Military personnel
• Stay at home parents
• Retirees
• people that are incarcerated (6 months or more)
• discouraged workers (mentally/psychologically beaten down from not getting a job)

Standard unemployment rate

• 4-5%
• If higher than 5%, worrisome
• 4% is ideal

Types of unemployment

• 1) Frictional unemployment - “Temporarily unemployed” or being between jobs, individuals are qualified workers with transferable skills but they aren’t working

Example: leaving one job for a better job

• 2) Seasonal unemployment - specific type of frictional unemployment which is due to the time of year and the nature of the job , these jobs will come back
• 3) structural unemployment - changes in the structure of the labor force make some skills obsolete, workers do not have transferable skills and these jobs will never come back, workers must learn new skills to get a job, the permanent loss of these jobs is called “creative destruction”
• 4) cyclical unemployment - unemployment that results from economic downturns (recessions); as demand for goods and services falls, demand for labor falls and workers are fired

Natural rate of employment

• Formula: frictional + structural

Full employment

• Means no cyclical unemployment
• 80-90% factory capacity so economists generally agree that an unemployment rate around 4-5% is full employment

February 06, 2017

Inflation

• A general rising level of prices, reduces the “purchasing power” of money
• Example: takes $6 to buy today what $1 bought in 1961

Three causes of inflation

• 1) printing too much money (quantity theory)
• 2) demand-pull inflation

“Too many dollars chasing too few goods” caused by excess of demand

• 3) cost-push inflation

Higher production costs increase prices

Standard inflation rate

• 2-3%

Formula for inflation rate

• ((current year price index  - base year price index)/base year price index)*100

Rule of 70

• Used to calculate the number of years it will take for the price level to double at any given rate of inflation
• Formula: 70/annual inflation rate

Deflation

• General decline in the price level

Disinflation

• Occurs when the inflation rate declines

Real investment rates

• The percentage increase in purchasing power that a borrower pays to the lender (adjusted for inflation)
• Formula: nominal interest rate - expected inflation

Nominal interest rates

• The percentage in money that the borrower pays back to the lender not adjusting for inflation

Nominal vs Real interest rate

• Example: You lend out $100 with 20% interest. Inflation is 15%. A year later you get paid back $120. The nominal interest would be 20% and real interest rate would be 5%.

Unanticipated inflation - unexpected inflation

• Hurt by inflation
• Lenders - people who lend money (at fixed interest rates)
• People with fixed income
• savers
• Helped by inflation
• Borrowers - people who borrow money
• A business where the price of the product increases faster than the price of resources

February 03, 2017

Nominal GDP

• The value of output produced in current prices
• Can increase from year to year if either output or prices increase
• Q*P

Real GDP

• The value of output produced in constant base year prices
• Can increase from year to year only if output increases
• To find economic growth, one would measure real GDP

Real GDP and normal GDP are only equal at the base year

In years after the base year, real GDP will exceed nominal GDP

	2012		2013
	Quantity	Price	Quantity	Price
Cars	10	$15,000	20	$16,000
Trucks	10	$20,000	20	$21,000

Nominal GDP for 2012:

Cars: 10*15000 = $150,000

Trucks: 10*20000 = $200,000

= $350,000

Real GDP for 2012 = $350,000 at base year, Real GDP and Nominal GDP are equal

Nominal GDP for 2013:

Cars: 20 * $16,000 = $320,000

Trucks: 20* $21,000 = $420,000

= $740,000

Real GDP for 2013:

Cars: 20*15000 = $300,000

Trucks: 20*20000 = $400,000

GDP deflator

• A price index used to adjust from nominal to real GDP
• Formula: (nominal GDP/real GDP)*100

Consumer Price Index

• Measures inflation by tracking changes in the price of a market basket of goods
• Formula: (price of market basket in current year/price of market basket in base year)*100

January 27, 2017

GDP

• The total value of all final goods and services produced within a country’s borders in a given year. This includes all the production/income within a country by its country’s producers

Included in GDP

• C = consumption

67% of the economy

Where money is spent

• Ig = gross private domestic investment

17% of the economy

Examples: construction of new housing, new factory equipment, factory equipment maintenance, unsold inventory of products built in a year

• G = government spending

18% of the economy

Examples: school buses, highways, defense

• Xn = net exports

(Exports - Imports)

-2% of the economy because the United States imports more than it exports

Excluded in the GDP

• Intermediate goods: to avoid double or multiple counting
• Used or second hand goods: to avoid double counting
• Unreported business activities: tips must be reported
• Stocks and bonds (purely financial transaction)
• Non-market activity: volunteer work
• Illegal activity: black market
• Gifts or transfer payments: public or private (examples: scholarships. Social security, unemployment, or somebody gifting you money)

GNP

• The total value of goods and services produced by Americans in a given year
• Includes the production/income earned by americans anywhere in the world
• Excluded in the GDP if goods are produced by non-Americans, even if the goods were produced in the United States

January 25, 2017

Circular Flow Model

• Represents the transactions in an economy by flows around a circle

Household

• people/groups that share their income

Firms/businesses

• An organization that produces goods or services for sale

Product Market

• Goods and services; anytime something is purchased for personal use and work is not exerted

Factor Market

• When labor is exerted; providing labor at a firm/business