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