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Over GDP and economic growth

Over Unemployment

Nominal & Real GDP

Nominal GDP

• Value of output produced in current prices

Real GDP

• Value of output produced in constant or base year prices
• Adjusted for inflation

Base Year

• Either the earliest year or given
• Nominal = Real when it is base year
• After; Nominal > Real
• Before: Real > Nominal

GDP Deflator

• Price Index used to adjust from Nominal to Real
• Base Year: Deflator = 100
• After: Deflator >100
• Before : Deflator < 100
• Calculated by (Nominal / Real) x 100

Consumer Price Index

• Common measure of inflation; measures cost of market basket of goods for average family
• Calculated by:
• (Market $ in given year/Market $ in base year) x 100

Inflation

• Calculated by:
• (New PI - Old PI)/(Old PI) x 100

GDP Fundamentals

GDP 

• Total dollar value of all final goods and services produced within a countries borders within a given year
• Included in GDP:
•  Consumption - 65%
• purchased finished goods and services
• Ig (Gross Private Domestic Investment) - 17%
• factory equipment maintenance
• new factory equipment
• new construction housing
• unsold inventory of products built in a year
• Government Spending - 20%
• School District counted 
• Net Exports - -2%
• Exports - Imports = Net Exports
• Not Included in GDP:
• Intermediate Goods - Not final, but in process
• Secondhand Goods -  To avoid double counting
• Purely Financial Transactions (stocks & bonds)
• Illegal Activities (drugs)
• Unreported business activities (unreported tips)
• Transfer payments
• Public (SS, VA, welfare)
• Private (Scholarships)
• Non-market activity (Volunteering, babysitting, solo work)

Calculating GDP:

1. Expenditure Approach:
• C  +  Ig  +  G  +  Xn  =  GDP
• Add all spending on final goods and services provided in a given year.
2. Income Approach
• Add all income resulted from selling final goods and services produced in a given year.
• Rarely used b/c dishonesty
• W  +  R  +  I  +  P  +  Statistical Adjustments  =  GDP
• Where:
• W = Wages
• R = Rent
• I = Income
• P = Profits/Proprietor's Income

• Compensation of employees: Wages/salaries, Wage/salary supplements (pensions, health ins., welfare)
• Rent: Income received by households and businesses that supply property resources
• Interest: Money paid to suppliers of loans (owe interest + principal)
• Proprietor's Income : Sole proprietorship and partnerships have
• Corp. Profits: Inc. Dividends, corp. income tax, undis. corp. profits
• Statistical Adjustments: Indirect business taxes; consumption of fixed capital (depreciation); net foreign factor payment

GNP

• Total value of all final goods and services produced by a country in a year whether on or off its land.

Unemployment

Unemployment

• Failure to use available resources, esp. labor, to produce desired goods and services.
• Labor Force - 16+, willing to work, employed, unemployed
• Excluded: 
• Military
• Homemakers
• Retired
• Disabled
• Asylum People'
• Incarcerated
• Students
• Those not looking for work
• Unemployment Rate - 4-5% = Full or natural unemployment; NRU
• Calculated by:
• [# of unemployed/labor force] x 100

Types of Unemployment

1. Frictional
• People job searching; temp. unemployed or between jobs; have transferable skills
• Ex: HS/College grad.; Job prospectors
2. Structural
• Changes in structure of labor force obviates skills; no transferable skills.
3. Seasonal
• Due to season and nature of job
• Ex: Bus drivers, Santa; Easter Bunny; Lifeguards; Construction
4. Cyclical
• Results from economic downturns i.e. recessions; as demand for goods and services fall, demand for labor fall and workers are laid off

• NRU = Frictional + Structural
• No Cyclical 

GDP Gap

• Amount by which actual GDP falls short of potential

Okun's Law

• For every 1% that actual unemployment exceeds NRU, GDP gap of 2% occurs

Rule of 70

• Determines amount of years to take for value to double given a particular annual growth rate.

Other Inflation

Interest Rates: Nominal v. Real

Nominal

• Not adjusted for inflation
• % increase in money paid to lender for use of borrowed money
• Real Rate of Interest + Inflation Premium 

Real 

• Adjusted for inflation
• % increase in purchase power lender receives when borrower repays loan with interest.
• Nominal Interest Rate - Inflation

Effects of Inflation

Hurt by Inflation

• Fixed income
• Savers
• Lenders/creditors

Helped by Inflation

• Borrowers

COLA - Cost of living adjustment - Wages increase when inflation occurs

Extra Calculations with GDP

Budget

• Gov. Purchases + Gov. Transfer Payments - Gov. Tax and Fee Collections
• [+] = Deficit
• [-] = Surplus

Trade

• Exports - Imports
• [+] = Surplus
• [-] = Deficit

National Income

1. Compensation + Rent + Interest Income + Proprietor's Income + Corp. Profits
2. GDP - Ind. Bus. Tax - Depreciation - Net Foreign Factor Payment

Disposable Personal Income

• Nat, Income - Per. Household Tax + Gov. Transfer Payments

Net to Gross

• Net (Domestic/National) + Depreciation = Gross (Domestic/National)
• Gross (Domestic/National) - Depreciation = Net (Domestic/National)

GNP

• GDP + Net foreign factor payment

Circular Flow Diagrams

A circular flow diagram represents various transactions in an economy

Components include:

• Household - Group/person that shares income
• Firm - Business that produces goods and services for sale
• The government

The Markets

• Factor/resource - Households sell resources and firms buy those resources
• Product - Firms sell products and households buy products