- Economist collect statistics on production, income, investment and savings; this is called National Income Accounting.
- Most important measure of growth
- It is the total dollar value of all final goods and services produced within a country's borders within a given year
- Intermediate Goods
- No multiple counting
- Only count final goods
- Second-hand or used goods
- Non-market activity
- Illegal drugs
- Babysitting
- Volunteering
- Financial Transaction
- Stocks, bonds, real estate
- Gifts and Transfer Payments
- Social security, scholarships, transfer payments
- What is included in GDP C+Ig+G+Xn
C - Consumption - 67% of the economy
- All finished goods and services
Ig - Gross Private Domestic Investment
- New factory equipment, construction of housing, factory equipment maintenance, unsold inventory
G - Government spending
- Government purchases goods and services
Xn - Net Exports
- Exports - Imports
Gross National Product (GNP)
- It is the total value of all final goods and services by citizens of that country on its lands or on foreign land
Add up the market value of all domestic expenditures made on final goods and services in a single year
C+Ig+G+Xn = GDP
- Income Approach
Add up all of the income earned by households and firms in a single year
W+R+I+P+ Statistical Adjustments = GDP
W=Wages
R=Rents
I=Interest
P=Profit
Wages - Compensation of employees, salary supplements (pension, health, insurance, welfare)
Rents - Tenants to landlords, lease payment by a corporation for the use of their space
Interest - Money paid by private businesses to the suppliers of loans used to purchase capital
Profit - Corporate income taxes, corporate profits, dividends
- Budget: How to Calculate
Government purchases of goods and services + government transfer payments - government tax and fee collection
- If you have a positive number, it is a budget deficit
- If you have a negative number, it is a budget surplus
Exports - Imports
- GNP: How to Calculate
GDP + Net Foreign Factor Income
- NNP - Net Nation Product: How to Calculate
GNP - Depreciation
- NDP - Net Domestic Product
GDP - Depreciation
- National Income
Compensation of employees + proprietors income + corporate profits + rental income + interest income
Disposable Personal Income
National income - Personal Household Taxes + Government transfer payments
Nominal GDP vs. Real GDP
Nominal GDP: It is the value of output produced in current prices. It can increase from year to year if output or price increases. P * Q
Real GDP: It is the value of output produced in constant or base year prices. It is adjusted for inflation. It can only increase from year to year if output increases.
In Real GDP, you would use the earliest year (base year). Q x BP
Price index = Measures inflation by tracking changes in the market basket of goods compared with that in a base year.
Price of market basket of goods in current year x 100
Price of market basket of goods in base year
GDP Deflator - Price index used to adjust from nominal to real GDP
Nominal GDP x 100
Real GDP
In base year GDP deflator is always equal to 100
For years after the base years, the GDP deflator will be greater than 100
For years before the base year, the GDP deflator is less than 100
Inflation Rate
New deflator - old deflator x 100
Old deflator
Inflation - is a rise in the general price level.
Inflation rate - measures the percentage increase in the price level over time. Key indicator of the economy's health.
Deflation - it is a decline in the general price level.
Disinflation - occurs when the inflation rate itself declines.
CPI - it measures inflation by tracking the yearly price of a fixed basket of goods and services. Indicates changes in the cost of living and the price level.
Finding inflation rate using market basket data:
Current year market basket value - base year
= Market basket value_ x 100
Base year market basket value
Find inflation rate using price indexes:
= Current year price index - base year price index x 100
Base year price index
Estimating inflation using the rule of 70.
Rule of 70 is sued to calculate the number of years it would take for the price level to double at any given rate.
Years needed to double inflation = 70
annual inflation rate
Determining real wages:
Real wages = nominal wages x 100
price level
Find real interest rate
Nominal interest rate - inflation premium
It is the cost of borrowing or lending money adjusted for expected inflation.
Nominal interest rate - it is the unadjusted cost of borrowing or lending money.
Demand-pull inflation - It is caused by an excess of demand over output that pulls prices upward.
Cost-push inflation - it is caused by a rise in per unit production cost due to increasing resource costs.
Anticipated inflation - Expect it to happen
Unanticipated inflation -
Hurt by Inflation Helped by Inflation
- Fixed income - Borrowers
- Lenders
- Creditors
- Savers
Unemployment- it is the percentage of people who do not have jobs, but are in the labor force.
Labor force- it is the number of people in a country that are classified as either employed or unemployed
Not in the labor force:
- Kids
- Military personel
- Mentally Insane
- Prison
- Retired people
- Stay at Home parents
- The discouraged
# of unemployed x 100
# of unemployed + # of employed
What is Full employment? Full employment occurs when there is no cyclical unemployment present in the economy.
- Natural Rate of Unemployment (NRU) - 4-5%
Why is unemployment good? There is less pressure to raise wages. There is more workers a viabable for future expansion.
Okun's Law - for every 1% of unemployment above the NRU causes a 2% decline in real GDP.
Frictional Unemployment: People that are between jobs. Quitting a job for a better job. Graduating and interviewing. Actively looking for another job.
Seasonal Unemployment: School bus drivers, life guards, construction workers.
Cyclical Unemployment: Associated with downturns in the business cycle. Bad for society and individuals.
Structural Unemployment: Associated with a lack of skills or a declining industry.
Market Economy Diagram
