Unit II NOTES! :) Here we are again...

1.  Command (centrally planned): Government has control over the factors of production and does not support or encourage new ideas and technology (Ex. CUBA)
2.  Traditional: Relies on habits, rituals, or customs. The elders usually makes the decisions, since they have been around longer to the customs, thus having more wisdom. (Ex. Different tribe, like African tribe or Native American Etc.)
3.  Free Market: People in firms act on their own self-interest allowing for buyers and sellers to exchange goods and services (Ex. Hong Kong) 
4. Mixed: The government controls some aspect of business production (Ex.U.S. & Canada) 

Market:  An institution allowing buyers and sellers to make/trade goods and services.

• Product Market: Buyer are usually the consumer, while the Seller is a firm.
• Factor Market: Buyer is a Firm, while Seller is Factor Owner 
• The most important factor is LABOR

Households: A person or group of people that share their income
Firms:  An organization that produces goods and services for sale.





 GDP  (Gross domestic product): Total value of all final goods and services produced within a country's borders within a given year
Equation: GDP = C (Personal consumption) + Ig (Gross private domestic investment) + G (Gov. spending of goods and services) + Xn (net exports [ Exports - Imports] )


GDP Includes:

• All production or income earned withing the U.S. by U.S. and foreign producers
• Final goods and services 
• Income earned
• W.R.I.P. (wage, rent, interest, profit) "Willie Rest In Peace"
• Interest payments on corporate bonds 
• Current production of goods and services 
• Business inventory (unsold output) 

NOT Included In GDP:

• Production outside of U.S. even by Americans
• Used Goods 
• Gifts (Ex. Scholarships) and Transfers (ex: Social Security)
• Stock  
• Unreported Business Activity (Ex. Tips)
• Illegal Activity (Ex. Hustling at School, Drug Dealing)
• Financial Transaction between Banks and/or Businesses 
• Intermediate Goods (Brass, which is used to make the final good, A TROMBONE! :)
• Non-Market Activity (Ex: Babysitting)

Expenditure Approach: income generated from production of goods and services
Equation: C + Ig + G + Xn
Income Approach: income generated from final goods and services 
Equation: W + R + I + P + statistical adjustments
(Helpful Tip: The expenditure approach and the income approach should equal each other. So what ever you get for Expenditure Approach just move over to Income Approach, because its hard to calculate Statistical Adjustment)


GNP (Gross national product): Total value of all final goods and services produced by American in a given year
GNP Includes: Production or income earned by Americans anywhere
GNP Excludes:  Production by non-Americans even in the U.S.


Deflation: A decline in general price level
Disinflation: When interest rate itself falls
Standard Inflation Rate = 2-3%


Rule of 70:The time it takes for inflation to double
Equation: 70 / annual inflation rate


Real Interest Rate: Equation: (Nominal interest rate - inflation)



Causes of inflation:

-Demand Pull:

• Caused by an excess of demand over output that pulls prices upward
• Sources:

1. Increase in Government Spending 
2. Massive Increases in the money supply (hyperinflation)  
3. Rising income as economy approaches full employment

- Cost Push:

• Caused by a rise in individual production cost due to increasing resource cost
• Sources:

1. Supply Shock: Dramatic increase in raw material prices due to a Shortage in material or a Growing input demand
2.  Price Wage Spiral: Workers seek higher wages to offset rise in consumer prices

Effects of inflation (Anticipated vs Unanticipated):

Unanticipated inflation: Has stronger effects because those who are expecting inflation might be able to adjust their work or spending activities

• Wages and pensions sometimes have costs of living adjustments built in to offset Anticipated Inflation
• Expected Inflation increase the nominal cost of borrowing while Unexpected Inflation reduces the real cost of borrowing
• Hurt by Inflation: Lenders, People who save up money, and those who have fixed incomes
•  Benefit from Inflation: Borrowers

Unemployment: The failure to use available resources
Employed: This includes those that are self-employed
Unemployed: 

1. A Newbie to the Job Market
2. A person who Re-Entered the Job Market
3. Someone who was Laid-Off (Job Shortage, could come back)
4. Someone who got Fired (you just were fit for the job)
5. Someone who Quit (Looking for a better job, people, etc.)

  People not included in the Labor Force:

• Armed Services
• Home Makers
• Students
• Retirees
• Disabled People
• People in Mental Institution
• People in Prison

Unemployment rate Equation: (# of unemployed / total labor force) * 100

• The Standard rate of Unemployment is between 4-6%

Types of Unemployment 

• Frictional: Temporary, Short-term, Transition ("Looking for job")
• Examples: Recently Graduated and looking for a job, People who quit/fired and are looking for a better job 
• Signals new job openings!
• Cyclical: Caused by a Recession due to a deficient demand for goods and services
• Jobs that were lost and that will come back when things get better
• Structural: Deals with new improvement of technology and long-term change
• Automation: Results from job loss due to change in consumer taste (Machines take your job, because they are faster or more efficient)
• Creative Destruction: As new jobs are created, others are lost 
• Seasonal: Depends on weather/season
• Ex: People who dress like Santa Clause 

Equations, Equations, and more EQUATIONS!!

1. NNP (Net National Product) - Indirect Business Taxes (IBT)
2. CE (wages) + Ri (rent) + Ii (interest income) + CP (corporate profits) + PI (proprietor's income)
3. GDP - IBT - depreciation - Net foreign factor payment

Disposable Person Income (DPI): National Income - Household Tax + Government transfer payments (GTP)


Trade: (Export - Import)

• Positive = Surplus 
• Negative = Deficit

Budget: Government purchase of goods and services + GTP - Government tax and fee collection

• Positive = Deficit 
• Negative = Surplus

Nominal GDP: Measures GDP in current dollars, no matter the produced output

• Equation: (Price * Quantity)

Real GDP: Measures GDP in constant dollar. Adjusted for inflation by holding the purchasing power of the dollar constant

• = Price * Quantity

GDP Deflator: (Nominal GDP / Real GDP) *100


Inflation: A rise in the general price level

• Equation: ((Price index of year 2 (New Price) - Price index of year 1(Old Price)) / Price index of year 1(Old Price)) * 100

Consumer Price Index (CPI):

• (Price of market basket in a year / Price of same market basket in previous year) * 100