Unit 2

1/31
-Circular flow model : Represents the transactions in an economy by flows around a circle.

-Factor market: Resources such as factors of production are bought and sold.
- Product market: Where goods and services are bought and sold.
- Economic Actors:

1. Household: Personal or group of people who share their income.
2. Firm: Organization that produces goods and services for sale.

2/3
-GDP(Gross Domestic Product) : Total value of all total final goods and services produced within a country's borders within a given year.
GDP includes:

1. Final goods and services (Finished product)
2. Income earned 
3. Interest payed on corporate bonds
4. Current production of final goods
5. Unsold output business inventories

GDP excludes:

1. Intermediate goods (To avoid multiple counting)
2. Transferred payments(public or private) ex: Social Security, scholarships, compensation
3. Purchases of stocks or bonds
4. Nonmarket transactions ex: babysitting, selling drugs, prostitution, volunteer work, (DIY)

-GNP(Gross National Product) : Total value of all final goods and services produced by Americans in a given year.

2/4

Formulas

-Expenditure Approach
GDP = C + Ig + G + Xn
Budget = Transfer payments + GPGS( government purchases of good / services) - GTFC(government tax/fee collections) 

• (+ : deficit) (- : surplus)

Trade = Exports - Imports 

• (- : deficit) (+ : surplus)

- Income Approach
GDP = W + R + I + P + Statistical adjustments

• W = Wages ( Salaries/ Compensation of employees)
• R = Rents ( Rental Income)
• I = Interest ( Interest Income)
• P = Proprietors Income 

-National Income

1. Compensation of employees + Rental Income + Interest Income + Proprietors Income + Corporate Profits
2. GDP - Indirect business taxes - Depreciation - Net Foriegn Factor Payment

- Disposable Personal Income 
National Income - Personal household taxes + Government Transfer Payments
- Net Domestic Product
GDP- Depreciation
-GNP 
GDP + Net Foreign Factor Payments
- Net National Product
GNP - Depreciation
- Gross Private Domestic Investment 
Net private domestic investment + Depreciation
2/5 
-Nominal GDP : The value of output produced in current prices, can increase from year to year. If the output of price increases it is inflation.

• Formula: PxQ

- Real GDP : The value of output produced in constant or base year prices, can only increase if output(quantity) increases. 

• Formula: PxQ

-GDP Deflator
Nominal GDP / Real GDP x 100

• In the base year the GDP deflator remains at 100
• For years after the base year the GDP deflator is greater than 100
• For years before the base year, GDP deflator is less than 100

2/6
- Consumer Price Index (CPI) : Measures the cost of the market basket of a typical American family 

• Cost of market basket in a given year/ cost of market basket in base year x 100

Inflation: General rise of the price level 
- Rate of Inflation 
CPI 2- CPI 1/ CPI 1 x 100]
Deflation : Fall of price level

2/10
- Types of Inflation

• Cost Push : Higher production cost increase prices, usually yje result of a supply shock
• Demand-pull : Too many dollars chasing too few goods, shortage driving up the prices

-Political Panic : Recession/ depression
- How does inflation hurt/ help?

• Hurt : Lender(loan money at fixed rate), people with fixed incomes, savers, people with fixed wages
• Help : Debtors

2/11
- Unemployment : Percent of people who don't have a job, but are in the labor force
- Labor force 

• made up of those that are employed and those that are unemployed

-Not in labor force

• Kids, military personnel, mentally disables, prisoners, stay at home moms/dads, full time students, retired people, the discouraged

Employed: 16 + working part time/ full time
Unemployed: 16 + who don't have a job but have actively searched for a job for a job in the last two weeks
- Unemployment rate 
(4-5%)
# of unemployed / labor force x 100
- Types of Unemployment

1. Seasonal: Waiting on correct season to conduct business 
2. Frictional Unemployment : In between jobs, because of new opportunities/ change in lifestyle
3. Structural: Change in skills, change in technology
4. Cyclical : Associated with downturns in the business cycle, bad for society as well as individuals

- Full Employment 
Natural rate of Unemployment = 4- 5 %
- Okun's law : For every one percent of unemployment that is above the NRU causes a 2 % decline in real GDP
- Rule of 70 : Length of time it takes to double the price levels.