Unit Seven: Last One of the Year

Balance of Payments

• Measure of money inflows and outflows between the U.S. and the Rest Of the World (ROW)
• Inflows are referred to as CREDITS (liability)
• Outflows are referred to as DEBITS (Assets)
• The Balance of Payments is divided into 3 accounts
• Current Account
• Capital/ Finance Account
• Official Reserve Account

Double Entry Bookkeeping

• Every transaction in the balance of payments is recorded twice in accordance with standard accounting practice
• Example: U.S. manufacturer, John Deere, exports $50 million worth of farm equipment to Ireland
• A credit of $50 million to the current account
• A debit of $50 million to the capital financial account
• Notice that the two transactions offset each other. Theoretically the balance payment should always equal zero

Current Account

• Balance of Trade or Net Exports
• Exports of goods/services-import of goods and services
• Exports create a credit to the balance of payment
• Imports create a debit to the balance of payments
• Net Foreign Income
• Income earned by U.S. owned foreign assets-income paid to foreign held U.S. assets
• Ex: Interest payments on U.S. owned Brazilian Bonds
• Interest payments on German owned U.S. Treasury Bonds
• Net Transfer
• Tend to be unilateral
• Foreign Aid is a debit to the current account
• Ex: Mexican migrant workers send money back

Capital/ Financial Account

• The balance of capital ownership
• Includes the purchase of both real and financial assets
• Direct investment in the U.S. is a credit to the capital account
• Ex: Toyota Factory in San Antonio
• Direct investment by the U.S. firms/individuals in a foreign country are debits to the capital account
• Ex: Intel factory in San Jose, Costa Rica
• Purchase of foreign financial assets represents a debit to the capital account
• Ex: Warren Buffet buys stock in Petro-China
• Purchase of domestic financial assets by foreigners represents a credit to the capital account
• The United Arab Emirats sovereign wealth fund purchases a large stake in the NASDAQ

What Causes Capital/ Financial Funds

• Differences in rates of return on investment
• Ceteris Paribus, savings will flow toward higher returns

Relationship Between Current and Capital Account

• The foreign currency holdings of the U.S. Federal Reserve system
• When there is a balance of payment surplus the Fed accumulates foreign currency and debits the balance of payments
• The official reserves zero out everything
• When there is a balance of payments deficit the Fed depletes it reserves of foreign currency and credits the balance of payments

Credits VS. Debits

• Credits: Additions to a nation's account
• Debits: Subtractions to a nation's account

How To Calculate the Following

1. Balance on trade
• (Merchandise + service export)-(merchandise + service imports)
2. Trade deficit occurs when the balance on trade is negative (imports>exports)
• Trade surplus occurs when the balance on trade is positive
3. Balance on Current Account
• (Balance on trade(exports + imports)) + Net Investment Income + Transfer Payments
4. Official Reserves
• Nationally
• ^CA + ^FA + ^Official Reserves = 0

Foreign Exchange (FOREX)

• The buying and selling of currency
• ex: In order to purchase souvenirs in France, it is first necessary for Americans to sell (supply) their dollars and buy (demand) Euros
• The exchange rate (e) is determined in the foreign currency markets
• Ex: The current exchange rate is approcimately 77 Japanese Yen to 1 U.S. dollar
• Simply put, the exchange rate is the price of a currency
• Do not try to calculate the exact exchange rate

(INSERT GRAPH FOR INCREASE IN DEMAND FOR EUROS)

Balance of Payments

• Assets Vs. Liabilities aka Inflows vs. Outflows
• Measure of money inflows and outlfows between the US and the Rest of the World
• Inflows as CREDITS
• Outflows Reserves Account

Flexible Exchange Rate: It is determined by market forces with little or no government intervention
Fixed Exchange Rate: Determined by government policy

Changes in Exchange Rates

• Exchange rates are a function of the supply and demand for currency
• An increase in supply of a currency will decrease the exchange rate of a currency
• A decrease in supply of a currency will increase the exchange rate of currency

Appreciation and Depreciation

• Appreciation: of a currency occurs when the exchange rate of the currency increases
• Depreciation of a currency occurs when the exchange rate of the currency decreases
• Ex: Of German tourists flock to America to go shopping then the supply of euros will increase and the demand for dollars will increase. This will cause the Euro to depreciate and the dollar to appreciate

Exchange Rate Determinants:

• Consumer Task
• Ex: A preference for Japanese goods create an increase in the supply of dollars in the currency exchange market which leads to depreciation of the dollar and an appreciation of Yen

Relative Income

• If Mexico's economy is stong and the U.S. economy is in a recessions, the Mexicans will buy more American goods, increasing the demand for the dollar, causing the dollar to appreciate and the peso to depreciate

Relative Price Level

• If the price level is higher in Canada than in the U.S. then American goods are relatively cheaper. Canadians will import more American goods causing the U.S. dollar to appreciate and the Canadian dollar to depreciate

Speculation

• If the U.S. investors expect that Swiss interest rates will climb in the future, the Americans will demand Swiss money

Tips

• Always change the D line on one currency graph, the S line on the other currency graph
• Move the lines of the two currency graphs in the same direction (right or left) and you will have the correct answer

Advantages

• Absolute: Faster, more, more efficient
• Comparative: Lower Opportunity Cost

Specialization

• Producing according to comparative advantage

Unit 5 & 6

AD/AS

From Short Run to Long Run

• AS curve doesn't shift in response to changes in the AD curve in the short run
• Example:
• Nominal wages do not respond to price-level changes
• Workers may not realize impact of the changes on may be under contract
• Long run- Period in which nominal wages are fully responsive to previous changes in price level
• When changes occur in the short run they result in either increased or decreased producer profits- not changes in wages paid
• In the long run increases in AD result in a higher price level, as in the short run, but as worker demand more money the AS curve is going to shift left to equte production at the original output level, but now at a higher price
• In the long run, the AS curve is vertical at the natural rate of unemployment (NRU), or full employment (FE) level of output. Everyone wants a job has one and no one is enticed into or put out of the market
• Demand- Pull inflation will result when an increase in demand shifts the AD curve to the right, temporarily increasing output while raising prices
• Cost-Push inflation reselts when an increase in input costs that shifts the AS cure to the left. In this case, price level is not in response to the increase in AD, but instead the cause of PL increasing.

Phillips Curve

• It represents the relationship between unemployment and inflation
• The trade off between inflation and unemploymnent occurs over the short run
• Each point on the Phillips curve corresponds to a different level of output

LRPC- Long Run Phillips Curve

• Occurs at NRU
• Represented by a vertical line
• No trade off between unemployment and inflation in the long run
1. The economy produces at the full employment output level
2. Nominal wages of workers fuilly incorporates any chnages in price level as wages adjust to inflation over the long run
• LRPC only shifts if LRAS curve shifts
• LRAS and LRPC= same determinants
• Increases in unemployment will shift LRPC right
• Decreases in unemployment will shift LRPC left

Short Run Phillips Curve (SRPC)

• Shifts downward
• Increases in AD= Up and left
• Determinants are the same as AD graph
• Decrease in AD= Downward and right

Supply Shock

• A rapid and significant increase in resource cost which causes the SRAS curve to shift

Natural Rate of Unemployment

• Equal to frictional + structural + seasonal unemployment
• NOT cyclical
• The natural rates and fewer worker benefits create a lower NRU

Misery Index

• A combination of inflation and unemployment in any given year
• Single digit misery is good

• If the inflation rate persists and the expected rate of inflation rises, then the entire SRPC moves upward, so when that happens stagflation exists
• If inflation expectation drop (new technology and efficiency) then the SRPC moves downward.

Stagflation-Occurs when you have high unemployment and high inflation occuring at the same time

Disinflation

• When inflation decreases over time
• Nominal wages increase
• Business profits fall as prices are rising
• Firms reduce employment thus unemployment increases

Laffer Curve

• Is a trade off between tax rates and government revenue
• Tax rates increase from zero, tax revenue increase from zero to some maximum level and then decline
• The higher the tax rate you set, the less you collect
• Controversial and debatable

Criticisms of the Laffer Curve

1. Where the economy is located on the curve is difficult to determine
2. Tax cuts also increase demand which can fuel inflation
3. Empirical evidence suggests that the impact of tax rates on incentives to work, save, and incest are small

Supply Side Economics-Reganomics

• 80's
• They support policies that support GDP growth by arguing that high marginal tax rates along with the current system of transfer payments (unemployment compensation/ social security) provide disincentives to work, invest, innovate, and undertake entrepreneurial ventures
• Believe the AS curve will determine levels of inflation, unemployment, and economic growth
• Trickle down effect

Marginal Tax Rate

• The amount paid on the last dollar earned or on each additional dollar earned
• Supply side economics- If you reduce Marginal tax rate, more people would be inclined to work longer, thus forgoing leisure time for extra income.
  
  
  
  
  
  
  1 Month and 8 days Left Until Graduation

Unit Four

I. Uses of Money

1. Medium of Exchange (to trade)
2. Unit of Account (Establishes worth)
3. Store of Money (Money holding value over a period of time)

II. Types of Money

1. Commodity Money
1. Gold/Silver coins
2. "goods"
2. Representative Money
1. IOU
2. Backed by something tangible
3. Fiat Money
1. Money because the government says so
2. The only one used today

III. Characteristics of Money

• Durability
• Portable (Coins or Paper)
• Divisability
• Uniformity
• Scarcity
• Accept

IV. Money Supply

• M1 Money (75% used)
• Consists of currency in circulation, checkable/demand deposits, and traveler's checks
• M2 Money
• Consists of M1 money + savings account + money market accounts + deposits held by banks outside the U.S.

V. Fractional Reserve System

• A process by banks of holding a small portion of their deposits in reserve and loaning out the excess

1. Banks keep cash on hand (Required Reserves) to meet depositer's needs
2. Banks must keep reserve deposits in their volts or in the Federal Reserve Bank
3. Total reserves are total funds held by a banks (TR = RR + ER)
4. Banks can legally lend only to the extent of their excess reserves
5. Reserve Ratio = RR / TR

Significance of a Fractional Reserve System

1. Banks can create money by lending more than their reserves
2. Required reserves don't prevent bank panics because banks must keep their RR
3. Reserve Requirement gives the Fed control over how much money banks can create

Functions of the FED (Federal Reserve Bank)

1. Control the nation's money supply through monetary policy
2. Issue paper money
3. Serve as a clearing house for checks
4. Regulates banking activity
5. Serves as a bank for banks
1. Issue out loans

Balance Sheet

• It is a statement of assets and claims summarizing the financial position of a firm or bank at some point in time
• It MUST balance
• Assets = Owner's Equity

Assets + Net Worth = Liabilities

• What you own (assets)
• What you owe (Liabilities)
• Net Worth (A claim of the owner, against the firm's assets)
• Don't really own it

How Banks Work

Assets

• RR= % Required by Fed to keep on hand to meet demand
• Excess Reserves (ER)- % reserves over and above the amount needed to satisfy the minimum reserve ratio set by Fed.
• Loans to firms, consumers, and other banks (earns interest)
• Loans to government = Treasury securities
• Bank Property- If the bank fails, you could liquidate the building/ property)

Liability + Equity

• Demand Deposits ($ put into bank)
• Timed Deposits (CD's)
• Loans from the Federal Reserve and other banks
• Shareholders equity- to set up a bank, you must invest your own money in it to have a stake in the banks success/failure
• Claims of the nonowners

*The Amount set by the Fed is the required reserve ratio
*Typically the Required Reserve Ratio=10%

Review

• Required reserves= Amount of deposit x Required reserve ratio
• Excess reserves= Total reserves - Required reserves
• Maximum amount a single bank can loan= the change in excess reserves caused by a deposit
• The money multiplier= 1/ Required reserves ratio
• Total change in loans= Amount single bank can lend x Money multiplier
• Total change in money supply= Total change in laons + Money amount of Fed action
• Total change in demand deposits= Total change in laons + any cash deposited
• The Fed has several tools to manage the money supply by manipulating the excess reserves held by banks, a practice known as monetary policy

Required Reserve Ratio

• The percent of demand deposits that must be stored as vault cash or kept on reserve as Federal funds in the bank's account with the Federal Reserve
• The required reserve ratio determines the money multiplier
• Decreasing the required reserves increases the rate of money creating in the banking system and is expansionary
• Increasing the required reserve decreases the rate of money creation in the banking system and its constractionary
• Changing the required reserve ratio is the elast used tool of monetary policy and is usually held constant at 10%

The Money Multiplier

• This shows us the impact of a change in demand deposits on loans and eventually the money supply
• The money multiplier indicates the total number of money created in the banking system by each $1 addition to the monetary base (bank reserves and currency in circulation)
• To calculate the money multiplier, divide 1 by the required reserve ratio

4 Types of Multiple Deposit Expansion Questions

1.       Type 1: Calculate the initial change in excess reserves

§         A.k.a. the amount a single bank can loan from the initial deposit

2.       Type 2: Calculate the change in loans in the banking system

3.       Type 3: Calculate the change in the money supply

§         Sometimes type 2 and 3 will have the same result (i.e. no Fed involvement)

4.       Type 4: Calculate the change in demand deposits

·         Ex 1.

1.       Given the required reserve ratio of 20%, assume the Federal Reserve purchases $100 million worth of US Treasury Securities on the open market from a primary security dealer. Determine the amount that a single bank can lend from this Federal Reserve purchase of bonds.

§         The amount of new demand deposits – required reserve =The initial change in excess reserves

§         $ 100 million (20% * 100 million)

§         $100 million - $20 million = $80 million in ER

2.       Determine the maximum change in loans in the banking system  from this Federal Reserve purchases of bonds

§         $80 million * (1/20%)

§         $80 million * 5 = $400 million max in new loans

3.       Determine the maximum change in the money supply from this Federal Reserve purchase of bonds.

§         The maximum change in loans + $ amount of Federal reserve action

§         $400 million + $100 million = $500 million max change in the money supply

4.       Determine the maximum change in demand deposits from this Federal Reserve purchase of bonds.

§         The maximum change in loans + $ amount of initial deposit

§         $400 million + $100 million = $500 million max change in demand deposits

Loanable Funds Market

• The market where savers and borrowers exchange funds at the real rate of interest
• The demand for loanable funs, or borrowing comes from households, firms, government and the foreign sector
• The demand for loanable funds is in fact the supply of bonds
• The supply of loanable funds, or savings comes from households, firms, governmnet, and the foreign sectore
• The supply of loanable funds is also the demand for bonds

Changes in Demand for Loanable Funds

• Remember that demand for loanable funds = borrowing
• More borrowing= more demand for loanable funds
• Less borrowing= less demand for loanable funds
• Examples:
• Government deficit spending= more borrowing= more demand for loanable funds
• Less investment demand= less borrowing= less demand for loanable funds

Changes in the Supply of Loanable Funds

• Remember that the supply of loanable funds= saving
• More saving= more supply of loanable funds
• Less saving= less supply of loanable funds
• Government budget surplus= more saving= more supply of loanable funds

Unit Three

Aggregate Demand

• Shows the amount of real GDP that the private, public, and foreign sector collectively desire to purchase at each possible price level. 
• The relationship between the price level and the level of real GDP is inverse

3 Reasons Why AD is Downward Sloping

1. Real Balances Effect

• When the price level is high households and businesses cannot afford to purchase much output.
• When the price level is low households and businesses can afford to purchase more output

1. Interest Rate Effect

• A higher price level increases the interest rate which tends to discourage investment
• A lower price level decreases the interest rate which tends to encourage investment

1. Foreign Purchases Effect

• A higher price level increases the demand for relatively cheaper imports
• A lower price level increases the foreign demand for relatively cheaper U.S. exports

Shifts in Aggregate Demand

• There are 2 parts to a shift in AD: 
• A change in C, I, G, Xn
• A multiplier effect that produces a greater change than the original change in the 4 components
• More government spending=AD->
• Less government spending=AD<-

Aggregate Supply

• The level of real GDP that firms will produce at each price level
• Long Run
• Period of time where input prices are completely flexible and adjust to changes in price level
• Level of real GDP supplied is independent of the price level
• Marks the level of full employment in the economy
• Analogous to PPC
• Is always vertical at full employment
• Shifts because of :
• Technology
• Capital resources
• Growth
• Entrepreneurship
• Resources available
• Short Run
• Period of time where input prices are sticky and do not adjust to changes in the price level
• Level of real GDP supplied is directly related to the price level
• Changes in SRAS:
• An increase is seen as a shift to the right
• A decrease is seen as a shift to the left
• The key to understanding shifts in SRAS is per unit cost production
• Per-unit production cost= total input cost/total output
• Determinants: 
• Input prices (Factors of Production)
• Productivity (Technology)
• Legal- institutional environment
• Input Prices: 
• Increases in resources prices=SRAS<-
• Decreases in resources prices=SRAS->
• Productivity
• Total output/total inputs
• More productivity= lower unit production cost=SRAS->
• Lower productivity=Higher unit production cost=SRAS<-

Ranges/Shapes/View of Aggregate Supply

Keynesian Range

• They believe in a horizontal curve because when the economy is below full employment, AD shifts outward (increase in GDPr, unemployment drops, price level is constant)
• Demand creates its own supply
• Competition is flawed
• In the long run we are all dead
• Depression REFUTES Say's Law
• Underspending persists
• Saving and Investments have different motivations
• Prices and wages are inflexible downward
• No competition
• C+I+G+Xn
• Fiscal Policy
• Active government
• AD determines output and employment
• Inflation is caused by too much demand

Intermediate Range

• This is where aggregate supply is between the Keynesian and Classical range
• GDP and Price level increase

Classical Range

• In the long run the AS curve is vertical because the effects of an increase in AD when we are already at full employment
• Supply creates its own demand
• Says Law
• Competition is good
• Invisible hand: Economy regulates itself
• In the long run the economy will balance at full employment
• Trickle Down Effect
• Underspending is likely
• Prices and wages are flexible downward
• If AD decreases, so does Price Level, which allows you to buy more
• AS determines output and employment
• MV=PQ
• Laissez Faire 
• Inflation is caused by too much money

What is Investment? 

• Money spent or expenditures on:
• New plants/factories
• Capital equipment
• Technology
• New homes
• Inventories

Expected Rates of Return: 

• Businesses make investment decisions by using a cost/benefit analysis
• Businesses determines benefits with expected rates of return
• Businesses count the cost with interest costs
• How does business determine the amount of investment they undertake?
• They compare expected rate of return to interest cost
• If expected return>interest cost : Invest
• If expected return<interest cost : Don't invest

Real V. Nominal

• What's the difference? 
• Nominal is the observable rate of intest
• Real subtracts out inflation

Investment Demand Curve

• Downward Sloping
• Because when interest rates are high, fewer investments are profitable; vise versa
• Conversely, there are few investments that yield high rates of return, and many that yield low rates of return

Shifts in Investment Demand

• Costs of production
• Business taxes
• Technological change
• Stock of capital
• Expectations

Disposable Income

• Income after taxes or net income
• DI=Gross income-Taxes
• Households can SPEND or SAVE

Consumption

• Household spending
• The ability to consume is constrained by the amount of disposable income and the propensity to save

Saving

• Household is not spending
• The ability to save is constrained by the amount of disposable income and the propensity to consume

Average Propensity to Consume (APC) and Avereage Propensity to Save (APS)

• APC+APS=1
• 1-APC=APS
• 1-APS=APC

MPC and MPS

• Marginal Propensity to Consume
• ^C/^DI
• % of every dollar earned that is spent
• Marginal Propensity to Save
• ^S/^DI
• % of every extra dollar earned that is saved
• MPC+MPS=1
• 1-MPC=MPS
• 1-MPS=MPC

Determinants of C and S

• Wealth
• Expectations
• Household debts
• Taxes

The Spending Multiplier

• An initial change in spending causes a larger change in aggregate spending or aggregate demand
• Multiplier= Change in AD/Change in Spending
• Multiplier=Change in AD/ Change in Consumption/Investment/Government Spending/Net Exports
• Exports and income flow continuously which sets off a spending increase in the economy

Calculating the Spending Multiplier

• Multiplier (+) increase in spending
• Multiplier (-) decrease in spending
• Multiplier=1/1-MPC or 1/MPS

Calculating the Tax Multiplier

• When the government taxes, the multiplier works in reverse
• Because now money is leaving the circular flow
• Tax Multiplier= -MPC/1-MPC or -MPC/MPS
• IF there is a tax cut, then the multiplier is positive, because there is now more money in the circular flow
• Almost always negative

Fiscal Policy

• Change in the expenditures or tax revenues of the federal government
• 2 tools of Fiscal Policy
• Taxes: Government can increase or decrease taxes
• Spending: Government can increase or decrease spending
• Fiscal Policy's enacted to promote our nation's economic goals: full employment, price stability, and economic growth

Deficits, Surpluses, & Debt

• Balanced Budget
• Revenues=Expenditures
• Budget Deficit
• Revenues<Expenditures
• Budget Surplus
• Revenues>Expenditures
• Government Debt
• Sum of all deficits-Sum of all surplus
• Government must borrow money when it runs a budget deficit
• Government borrows from 
• Individuals
• Corporations
• Financial institutions
• Foreign entities or foreign governments

Fiscal Policy 2 Options

• Discretionary Fiscal Policy (Action)
• Expansionary- think deficit; recession
• Contractionary- think surplus; tight money
• Non-discretionary Fiscal Policy (No Action) 

Discretionary V. Automatic Fiscal Policy

• Discretionary
• Increase or decrease in government spending and/or taxes in order to return the economy to full employment
• Involves policy makers doing fiscal policy in response to an economic problem
• Automatic
• Unemployment Compensation and marginal tax rates are examples of automatic policies that help mitigate the effects of recession and inflation
• Takes places without policy makers shaving to respond to current economic problems

Contractionary V. Expansionary Fiscal Policy

• Contractionary
• Policy designed to decrease aggregate demand
• Controls inflation
• Decrease in government spending
• Increase in taxes
• Expansionary
• Designed to increase aggregate demand
• Strategy for increasing GDP, combatting a recession, and reducing unemployment
• Increase in government spending
• Decrease in taxes

Progressive Tax System

• Average tax rate (tax revenue/GDP) rises with GDP
• The more progressive the tax system, the greater the economy's built in stability

Proportional Tax System

• Average Tax rate remains constant as GDP changes 

Regressive Tax System

• Average Tax rate falls with GDP

Reflection: 

This unit has been the hardest of the semester. I struggled grasping the basic concept of each section. After several tutorial sessions, questions, wrong answers, and reviewing for the past test, I feel as if I understand everything a little better than previously. Though I am going no where near a business occupation in the future, this unit of economics helped me see that some of these concepts can be used in life. Such as saving and spending, deficit, and disposable income. 

2 Months and 19 Days Until Graduation

Unit Two

Types of Economic Systems

Command: 

• "Centrally planned"
• Government owns capital and land and controls labor
• All the prices are the same because the government set everything
• No competition
• Example: Cuba

Traditional

• Based on habits, rituals, and customs
• Decisions are made by elders
• Discourage new ideas and technology
• Example: Tribes

Mixed

• Businesses are regulated by government to protect the public's interest
• Example: United States, Canada, and Mexico

Free Market

• People and firms act in their own best interest
• Buyers and sellers exchange goods and services
• Example: Hong Kong 

 The Big Picture

3 Economic Questions

Must be asked and answered

1. What goods and services should be produced? 
2. How should these goods and services be produced? 
3. Who will consume these goods and services? 

Market

Definition: An institution that allows buyers and sellers to trade

Product Market

• The buyer is usually the consumer and the seller is a firm

Factor Market

• Also known as the resource market
• Factors of Production
• The buyer is usually the firm and the seller is the factor owner

Households- A person or a group that share an income

Firms- An organization that produces goods and services for sell 

Gross Domestic Product (GDP)

• A total value of all final goods and services produced in the U.S. in a given year
• Includes all production or income earned within the U.S. by U.S. and foreign producers
• Does not include production outside of the U.S., even by Americans

Formulas for GDP

C + IG + G + Xn

• Expenditure Approach
• It is income generated from production of goods and services

Personal Consumption (C)

• 67%
• Purchases of finished goods and services

Gross Private Domestic Investment (IG) 

• New factory equipment
• Construction of housing
• Factory equipment maintenance
• Unsold inventory of products built in a year

Government Spending (G) 

• Government purchases of goods and services

Net Exports (Xn)

• Exports - Imports

W + R + I + P (+ Statistical Adjustments) 

• "Willie Rest In Peace" 
• Wages + Rents + Interest + Profits
• Income Approach
• Add all income generated from production of final output

Items That do NOT Count in GDP

• Used goods or second hand goods
• Gifts or transfers
• Stocks and bonds
• Social Security
• Unreported business activities 
• Illegal activities
• Financial transactions between banks and businesses
• Intermediate goods
• Non-market Activities 

Other Equations 

Gross National Product (GNP) 

• GDP + Net Foreign Factor Payment
• It is the total value of all final goods and services produced by Americans 
• Includes production or income by Americans anywhere in the world 
• Excludes production by non-Americans, even in the U.S. 

Gross Private Domestic Investment

= Net Private Domestic Investment + Depreciation

Net Domestic Product (NDP)

=GDP - Depreciation (Consumption of fixed capital) 

• GDP adjusted for depreciation

National Income (NI) 

= Compensation of Employees (CE) + Rental Income (RI) + Interest Income (II) + Corporate Profits (CP)              

    + Proprietor's Income (PI)  

= Net National Product (NNP) - Indirect Business Taxes (IBT)
= GDP - IBT- Depreciation - Net Foreign Factor Payment

• Income earned by American owned resources

Net National Product

=GNP - Depreciation

Personal Income 

• Income received by households regardless of the source

Disposable Personal Income

= NI - Household Taxes (HT) + Government Transfer Payments (GTP) 

• After tax income available for household consumption

Real GDP (RGDP) 

= Current Quantity X Base Price 

• Measures GDP in constant dollars and it is adjusted for inflation

Nominal GDP (NGDP)

= Current Price X Current Quantity

• Measures GDP in current dollars no matter what the output is

GDP Deflator

= (Nominal GDP / Real GDP) X 100

Inflation Rate

= ((Price Index of Year 2 - Price Index in Year 1) / Price Index in Year 1) X 100

• A rise in general level of prices

Consumer Price Index (CPI) 

= (Price of the Market Basket in the Particular Year / Price of the Same Market Basket in Base Year) X 100

• Most widely used measure of the overall price level in the U.S. 
• Market basket of goods price

GDP Deflator

• The measure of the level of prices of all new domestically produced final goods and services in an economy

Inflation

• A rise in the general price of products
• "A dollar today can buy less than it did yesterday"
• 2-3% inflation is good

Deflation

• A decline in the general price level (most industrious nations undergo)

Disinflation

• Occurs when the inflation rate itself declines (gas prices)

Equation:

• (Current Year Price Index NEW - Prior Year Price Index OLD) / OLD Prior Year Price Index

Rule of 70

• How many years it will take to double inflation
• 70 / Annual Inflation Rate

Finding Real Interest Rates

= Nominal Interest Rate - Inflation

• Cost of borrowing or lending money that is adjusted for expected inflation
• ALWAYS expressed as a PERCENTAGE

Nominal Interest Rate

• An unadjusted cost of borrowing or lending money, also expressed in percentages

Causes of Inflation-

Demand Pull

• Caused by an excess of demand over output that pulls prices upward
• Output and employment rise while the price level is also rising
• Spending increases faster than production

Cost Push

Caused by a ruse in per unit production cost due to increasing resource cost

Effects of Inflation

• Anticipated VS. Unanticipated  
• Unanticipated has stronger effects because those expecting inflation may be able to adjust their work or spending habits to avoid or lessen the effect
• Wages may have cost of living adjustments built in to offset anticipated inflation

 WINNERS AND LOSERS OF INFLATION

• Fixed income people will be hurt because real income suffers; Nominal income doesn't rise with prices
• Social Security/ Pension
• Savers are hurt by unanticipated inflation because inflation takes away from the interest earned on the account
• Borrowers can be helped by unanticipated inflation because debt  can be repaid with cheaper dollars
• Lenders are hurt because of the same reason stated above

Unemployment

Failure to use available resources (labor) 

Employed

• Includes those that are self- employed

Unemployed

• New entrants
• Re-entrants
• Laid off
• Lost last job
• Quit last job

Not in Labor Force

• Armed services
• Homemakers (Stay at home parents)
• Students
• Retirees
• Disabled people
• Mental institutions

Unemployment Rate = (# of unemployed / Total Labor Force) X 100

Standard Unemployment Rate- 4-6%

Types of Unemployment

Frictional Unemployment

• Temporary, transitional, short term
• Searching or in between jobs
• Graduates of high school or college
• People who quit or got fired
• People who are looking for a better job
• It signals that new jobs are available and reflects freedom of choice

Cyclical Unemployment

• Economic downturn in business cycle because there is a deficient demand for goods and services
• Caused by recession
• If you lose your job due to recession, it will come back

Structural Unemployment

• Deals with technology
• Automation: Your job may become obsolete due to changes in consumer's taste
• Creative Destruction: As jobs are created, others are lost
• Change in skill

Seasonal Unemployment

• Dependent on the season or weather
• Santa Clause/ Easter Bunny/ Lifeguard/ Construction workers

Full Employment

= Natural rate of unemployment (NRU)

• It is equal to structural and frictional unemployment
• Does not mean zero unemployment

Okun's Law

• Describes how unemployment relates to nation's GDP
• States that for every 1% unemployment above the NRU, a negative GDP gap of 2% will occur

Unequal Burdens of Unemployment

1. Rates are lower for white collar workers
2. Teenagers have the highest rates
3. Blacks have the higher rates than whites
4. Rates for males and females are comparable

Economic Norms

GDP Growth (Real): 2-3%
Unemployment: 4-5%
Inflation Rate (CPI): 2-3%

Well I hope this post helped to put some of the ideas of Unit Two together and give you a clearer look on everything. I know that I now have a better understanding of unemployment, inflation, GDP, and our market economy after these past couple of weeks. Feel free to comment with any further input or elaboration
 on what was discussed in this blog.

3 Months and 19 Days Until Graduation

Unit One: Basic Concepts of Economics

Introduction

There are a few simple concepts that we as economic students must understand before going any further into this class. They include the difference between macroeconomics and microeconomics, positive economics and normative economics, needs and wants, goods and services, productive efficiency and allocative efficiency, and scarcity. 

• Macroeconomics: The study of major components of the economy 
• Microeconomics: The study of how households and firms make decisions and how they interact in markets
•  Positive Economics: Attempts to describe the world as it is (REALITY)
• Normative Economics: Says how the world SHOULD be
• Needs: Basic requirements for survival
• Wants: A desire
• Goods: A tangible commodity
• Services: Work performed by someone else
• Productive Efficiency: Products are being produced in the least costly way
• Allocative Efficiency: Products being produced are the ones that society most desires
• Scarcity: The MOST FUNDAMENTAL PROBLEM facing all societies

"Satisfying unlimited wants with limited resources" 

 4 Factors of Production

1. Land: Natural Resources
2. Labor: Work force
3. Capital
1. Human
2. Physical
4. Entrepreneurship: Taking risks

Side Notes

•  Opportunity cost is what you give up to get something else. The next best alternative
• When the PPC shifts to the left there is:
• A permanent lost of productive capacity
• A decrease in the labor force, work skills, and education
• When the PPC shifts to the right there are:
• Technological advances
• New discoveries
• Or it is because of trade

Supply 

•  The quantities that producers or suppliers are willing or able to produce or sell at various prices
• There is a direct relationship between price and quantity supplied
• Refer back to note sheet for the causes of ^ in supplied

 Demand

• The quantities that people are willing or able to buy at various prices
• There is an inverse relationship between price and quantity demanded
• Refer back to notesheet for the causes of ^ in demanded

Take a look at this example of a Supply and Demand Graph!

Production Costs:

Fixed Cost: A cost that does not change no matter how much is produced 
Variable Cost: Cost that fluctuates or changes depending on how much is produced
Marginal Cost: The cost of producing one more additional unit of a good

 Equations: 

• TC=TFC/Q
• AFC=TFC/Q
• AVC=TVC/Q
• ATC=TC/Q
• ATC=AFC=AVC
• MC=new TC-old TC

Example Table: 

 

Conclusion

These were the main topics or notes that I felt needed to be highlighted in my blog. For the past three weeks I have learned there is a lot more going on when the new iPhone goes on sale, when I find a coupon for a burger, or just chose a Pepsi instead of a Coke. This class comes with a new perspective, or outlook, or the simple things I spend money on. I may now think, "Why do I want this soda instead of the other?", "What made me buy this laptop now instead of later?", "Is there a reason why I bought french fries too?". The answers to those questions are all determinants, a change in this or that. I have learned that there is a reason for everything do, economically speaking of course. I look forward to learning more about what shapes this country's and world's money based society. 

Suggested Questions/Comments: 

1. Comment on your thought process when purchasing a fast food meal and relate it back to what you have learned in economics.
2. What is determinant do you believe has a greatest effect on either demand or supply? Explain.
3. Explain how you would react after seeing a positive or negative article about your favorite restaurant. Give examples for various positive and negative advertisements. Relate this back to what you have learned in this unit. 
4. Give examples of things that have a fixed or variable cost.
5. Correct any of my typos and higher my education.
6. Feel free to comment anything else you feel would get you your desired grade. 

4 Months and 10 Days Until Graduation