Input/Output

Input/Output

Absolute advantage:

• Individual: exists when a person can produce more of a certain good/service than someone else in the same amount of time
• National: exists when a country can produce more of a good/service than another country can in the same time period

Comparative advantage:

• Individual/national: exists when an individual or nation can produce a good/service at a lower opportunity cost than can another individual or nation

Input problems

• the country/individual that uses the least amount of resources, land or time, has the absolute advantage

Output problems

• country/individual that can produce the most has the absolute advantage
• The country/individual that has the lowest opportunity cost has the comparative advantage in that product
• (in some format it deals with production)

Absolute advantage

• faster, more, more efficient

Comparative advantage

•  lower opportunity cost

Foreign Exchange Market

Foreign Exchange Market

Foreign exchange (FOREX): the buying and selling of currency

• The exchange rate (e) is determined in the foreign currency markets
• Simply put. The exchange rate is the price of a currency

Tips

• Always change the D line on one currency graph, the S like on the other currency's graph
• Move the lines of the two currency graphs in the same directions (right or left) and you will have the correct answer 
• If D on one graph increases, S on the other will also increase
• If D moves to the left, S will move to the left on the other graph

Changes in exchange rate

-Exchange rates (e) are a fiction of the supply and demand for currency

• An increase in the supply of a currency will make it cheaper to buy one unit of that currency
• A decrease in supply of a currency will make it more expensive to buy one unit of that currency
• An increase in demand for currency will make it more expensive to buy one unit of that currency
• A decrease in demand for a currency will make it cheaper to buy one unit of that currency

Appreciation: appreciation of a currency occurs when the exchange rate of that currency increases 

Hypothetical: 100 yen used to buy $1

Depreciation: depreciation of a currency occurs when the exchange rate of that currency decrease

• One hundred ten used to buy now dollar. Now 50 yen buys one dollar
• The dollar is weaker because it takes fewer yen to buy one dollar

Exchange rate determinants

• consumer tastes
• relative income
• relative price level
• speculation

Purchasing power parity: when the current rates are set by international markets changes will be based on the actual purchasing power of the currencies

• For ex: if US dollar to European euro is $1.50 to 1 than each S1.50 will buy one euro however if an item in the U.S. cost $1.50, and then cost more or less than one euro, the parity is lost, markets will adjust quickly in floating rates or pressure for change will occur in fixed rates 

Why do we exchange currencies?

1. To invest in other countries stocks and bonds
2. Sell exports and buy imports
3. To build factories or stores in other markets
4. To hold currencies in ban accounts for future imports, exports, or business loans
5. Tp speculate on currency values
6. To control excessive imbalances and the imbalance will come from the balance of payment

Phillips Curve

Phillips Curve

Short run
Time too short for wages to adjust to the price level

Workers may not be aware of changes in their real wages due to inflation and have adjusted their labor supply decisions and wage demands accordingly

Nominal wages: amount of money received per day per hour or per year

Sticky wages: nominal wage level is set according to an initial price level and it does not vary

Long run aggregate supply
Time long enough for wages to adjust to the price level
-flexible wage and price level
-both offset each other

Phillips curve: Represents relationship between unemployment and inflation
-the trade off between inflation and unemployment only occurs in the short run
-long run Phillips curve: occurs at the natural rate of unemployment , if the natural rate of unemployment change, the lspc change
▪️represented by a vertical line
▪️no trade off between unemployment and inflation in the long run this means the economy produces at. A full employment level
▪️lrpc will only shift if the LRAS curve shifts otherwise it is assumed to be stable
▪️major lrpc assumption is that more worker benefits create higher natural rates and fewer worker benefits creates lower natural rates

Short run Phillips curve
-there is an inverse relationship between inflation and unemployment
-has a relevance to Okun's law
-since wages are sticky inflation changes on the srpc
-if inflation persists an expected rate of inflation rise then the entire srpc moves upward which causes stagflation
-if inflation expectations drop, due to new technology or economic growth then the srpc will move downward
-aggregate supply shocks can create both higher rates of inflation and higher rates of unemployment
-supply shocks: rapid and significant increase in resource cost

Misery index: a combination of unemployment and inflation in any given year
- single digit misery is good


The long run Phillips curve (lrpc)
-because the long run Phillips curve exists at the natural rate of unemployment (Un), structural changes in the economy that affect Un will also cause the lrpc to shift
-increases in Un will shift lrpc ➡️
-decreases in Un will shift lrpc ⬅️

Stagflation: period where we have high inflation and high unemployment occurring at the same time
-after Vietnam war
-baby boom
-civil rights movement
-women's movement


Disinflation: reduction in inflation rate from year to year

Deflation: it is a situation in which there is an actual drop in the price level

It is the belief that the as curve will determine levels of inflation, unemployment and economic growth

-to increase the economy the as curve should shift to the right which will always benefit the company first

Amount paid on the last dollar earned or on each additional dollar earned so by reducing the marginal tax rate, supply siders believe that you will encourage more people to work longer and forego leisure time for extra income

Support policies that promote GDP growth that arguing that the high marginal tax rate along with the current system of transfer payments, they provide disincentives to work, invest, innovate, and undertake entrepreneurial ventures

Reaganomics : lower marginal tax rate to get the us out of a recession ➡️Results in deficit

Laffer curve: It is a trade off between tax rates and government revenue
-it is used to support the supply side argument
3 criticisms of the laffer curve
1. Research suggest that the impact of tax rates on incentives to work, save, and invest are small
2. Tax cuts increase demand which can fuel inflation and causes demand to exceed supply
3. Where the economy is actually located on the curve is difficult to determine

Balance of Payments

 Balance of payments: measure of money inflows and outflows between the united stated and the rest of the world (ROW)
-inflows are referred to as credits
-outflows are referred to as debits
-balance of payments is divided into 3 accounts
1. Current account
2. Capital/financial account
3. Official reserves
Double entry bookkeeping: every transaction in the balance of payments is recorded twice in accordance with standard accounting practice
Ex: us manufacturer, john Deere, exports $50 million worth if farm equipment to Ireland
-$50 million worth of farm equipment or physical assets
-a debit of $50 million to the capital/financial account (+$50 million worth of euros or financial assets)

Balance of trade or net exports
-exports of goods/services-import of goods/services
-exports create a credit to the balance of payment
-imports create a debut to the balance of payments
Net foreign income
-income earned by us owned foreign assets - income paid to foreign held us assets
-ex. Interest payments on is owned Brazilian bonds - interest payments on German owner us treasury bonds
Net transfers (unilateral)
-foreign aid ->a debut to the current account
-ex: Mexican migrant workers send money to family in Mexico
Capital/financial account
-the balance of capital ownership
-includes the purchase of both real and financial assets
-direct investment in the United States is a credit to the capital account
-purchases of stocks and bonds by foreigners
-purchase of foreign financial assets represents a debit to the capital account
-ex. Warren buffet buys stock in petrochina
-purchase of domestic financial assets by foreigners represents a credit to the capital account
-United Arab emirates sovereign wealth find purchases a large stake in the NASDAQ
Relationship between current and capital account
-The current account and the capital account should zero each other out
-If the current account has a negative balance (deficit) then the capital account should then have a positive balance (surplus)
 
 Official reserves:

• The foreign currency holdings of the us federal reserve system
• when there is a balance of payments surplus the fed accumulated foreign currency and debits the balance of payments
• When there is a balance of payments deficit the fed depletes it's reserves of foreign currency and credits the balance of payments
• The official reserves zero out the balance of payments

Active v. Passive official reserves

• The United States is passive in it's use of official reserves. It does not seek to manipulate the dollar exchange rate
• The peoples republic of china is active in it's use of official reserves. It actively buys and sells dollars in order to maintain a steady exchange rate with the United States.

Formulas

Balance of trade:

• goods and services exports - goods and services imports
• (if imports > exports) trade deficit or trade surplus (if exports > imports)
• goods exports + good imports

Current account:

Balance of trade + net investment + net transfer

Capital account:

Foreign purchases of U.S. assets + U.S. purchases of assets abroad

Official reserves:

Current account + capital account

How to calculate goods and services:

Good imports + service imports

MONETARY POLICY

Video number 1

There are three types of money. The first one is commodity is the purpose that function as money. A representative is represent metals. Fiant is the money that must accept by transaction. There are three types of function of money. The first one is medium of exchange it means you exchange something. Store of value is when you put money away and you expected to still have value when you use it. The last one is the unit account with this we can said price indicate worth.

Video number 2
Money Market
Demand is down because price is high, so demand is low but the  price is high, basically they have an inverse relationship.SM is vertical does not vary on interest rate. Interest rate on the  y-axis. on the money graph x-axis is QM increase money supply is the right decrease is to the left.

Video number 3

Expansionary and contradictary is have a inverse relationship. Discount rate is the bank can borrow from the FED. In expand the money supply the Fed buy bonds. in contradictary the Feb sell bonds.

Video number 4

Interest rate on the y-axis. quantity of loanable fund on the axis. Dlf downward and Slf is upward. The slf is the amount of money people have in bank. The more people put money in the bank, the more loans bank will be available.

Video 5
Money creation create money by making loans. RR is the amount the bank need to keep. Multiplier is 1/RR. Multiplier deposit to add all the potential loans. Money creation have multiplier and multiple deposit expansion.

Video 6

Money market lonable fund and AD-AB graph. It's better to put them side by side. Money supply and loanable fund have a interest rate as their y-axis. Both DM and Dlf are going down

Loanable funds market:

 

• The market where savers and borrowers exchange funds at the real rate of interest.
• Demand for loanable funds or borrowing comes from households,firms,gov and the foreign sector. The demand for loan able funds is in fact the supply of bonds. 
• The supply of loan able funds or savings comes from households,firms,gov and the foreign sector. The supple of loan able funds is also the demand for bonds.

Changes in the 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 (<-)

Changes in the supply of Loanable funds 

• Remember that supply of Loanable funds=saving 
• More saving=more supply of Loanable funds(->)
• Less savings=less supply of Loanable funds (<-)

Final thoughts on Loanable funds 

• Changes in saving and borrowing create change in loanable funds and therefore the r% changes
• change in the real interest rate will affect GDP

 

key principle

• A single bank can create money (through loans) by the amount of excess reserves
• Banking system as a while can create money by a multiple (deposition) money multiplier of the initial excess reserves.

Factors that weaken the effectiveness of deposit multiplier:

1. If banks fail to loan out all of its excess reserves.
2. If bank customers take their loans in cash rather than in their checking account deposits it creates a cash or currency drain.

MONEY MARKET

Inverse relationship between money, demand, and interest rates.

DM ; MD up    :  ir down

money demand shifter:

1. Change in price level
2. Change in income

Function of the FED

-It issues paper currency 

-sets reserve requirements and holds reserves of banks

-lends money to banks and charges them interest

-they are a check clearing service for banks

-It acts as personal bank for the Government

-supervises member banks

-Controls the money supply in the economy

How banks work

Asset

• Reserves
• Required reserves(rr) - % required by FED to keep on hand to meed demand.
• Excess reserves(er) - % reserves over and above the amount needed to satisfy minimum Reserve ratio by FED
• Loans to firms, consumers, & other banks (earn interest)
• Loans to government (if the bank fail could sell the building/property) 

liabilities + Equity

• Demand deposits ($ put into bank)
• Timed deposits(CD)
• Loans from: FED reserves & other banks
• Shareholders equity

Creating a bank:

• Transaction
• Depositing reserves in a FED. reserve banks
• Required reserves
• Reserve ratio commercial banks required reserve/commercial banks checkable deposit liability 
• Excess Reserve

 

Time Value of Money

Time value of money 

Time Value of Money

Is a dollar today worth more than a dollar tomorrow?
- yes

• Inflation
• opportunity cost and inflation
• this is the reason for  changing and paying interest

Let V= future VALUE of prices
P= PRESENT VALUE of prices
R= REAL INTEREST RATE (Nominal rate- inflation rate) express as a decimal
n= YEARS
K= Number of times interest is credited per year

Simple Interest Formula

V=( 1+ R)^n x P

Compound Interest Formula
V=(1+R/K)^nk x P

R% = 1 % - pie%

Monetary Equation of Exchange
MV=PQ
-M= Money supply (M1 or M2)
-V Money's Velocity (M1 or M2)
-PL= Price Level (PL on the AS/AD diagram)
-Q= Real GDP ( sometimes labeled Y on the AS/AD diagram)

 

Investment

Investment: directing resources,consume now for the future.
Financial Asset:claims on property and income of the borrower
Financial Intermediaries: institution that channels funds from savers to borrowers.

  Purposes for Financial Intermediaries

• Share risk Diversification 
• Reduce risk
• Provides
• Liquidity returns account investment received above and beyond in a sum of money that investment
  

Bond

• Coupon rate
• Maturity
• Par Value

• Loans or IOUs that represent debt that the Government  or a cooperation must repay to an investor
• Low risk investments
• Coupon Rate
• Interest rate that a bond issuer will pay to a bond holder
•  It's time at which payment to a bond holder is due
• Hard value it's a account that invested pay to purchase a bond that will be repay at maturity
• 
  

Yield:Annual rate of return on a bond of the bond were held to maturity 


Bond you LOAN
Stocks you OWN

~MONEY~

Money- that is use to purchase goods and services.

Three uses of money

• Meaner of exchange to determine value.

• Unit of Account 
• compare prices

• Store Value
• how money can be store                                                                                                  

1.  Commodity Money: value within its self

• Salt
• olive oil
• gold

2.  Representative Money: Represents something of value

• IOU

3.  Fiat Money: Money because government says so 

• coins

Currency is money BUT not all currency is money

6 Characteristics of Money

1. Durability (last long)
2. Portability ( take it everywhere)
3. Divisibility (Broken down) ex(1 dollar is 10 dimes)
4. Uniformity (looks the same, updates)
5. Limited supply
6. Acceptability 

Money Supply

All the available money in the economy 

M1

• Total value of finical available in use economy
• Liquid assets (easily to convert to cash)
• Crash
• Paper Currency
• coin
• check-able deposits or demand deposits  (checks or checking account)
• Travelers Checks

M2

• Consists of M1 Money
• Savings Accounts 
• money market accounts. 

Financial Institutions

1. Store Money
2. Save Money
3. Loan Money(Credit card)

Save Money

• Savings Account
• Checking Account
• Money Market Account
• CD certificate of Deposit

Loan

• Banks operate on reserve system which where they keep their fraction of the fund and loan out the rest.

Interest Rate

• Principal:amount of money borrowed
• Interest: price paid for the use of borrowed money
• simple interest: paid on the principal
• compound interest: paid on the principal and Interest

Formulas
P- Principal
R- rate of interest
T- time
Simple Interest
I= P x R x T/ 100
Time
T= I x 100/ P x R
Principal
P = I x 100/ R x T
Interest Rate
R = I x 100/ P x T
Types of financial Institutions

1. Commercial banks
2. loans and saving institutions
3. mutual savings banks
4. credit unions
5. financial companies   

Fiscal policy

• Changes in the expenditures or tax revenues of fiscal gov't
• - 2 Tools of fiscal policy:
• Taxes - government can increase or decrease taxes
• Spending- government can increases or decreases spending
• Fiscal- is enacted to promote our nation's economic good: full employment, price stability, economic growth

Deficits Surplus and Debt

• Balance budget
• Revenues =Expenditures
• Budget deficit
• Revenue < expenditures
• Budget Surplus
• Revenues > expenditures

Government borrows from

• individuals
• corporations
• financial institutions
• foreign entities or foreign government

Fiscal Policy Two options

•  Discretionary fiscal policy (action)
• Expensionary fiscal policy (think deficit)
• Discretionary Fiscal Policy(think deficit)
• Contractionary Fiscal Policy-think surplus
• Non-Discretionary Fiscal Policy (action)

Discretionary v automatic fiscal policies

• discretionary

• increasing or decreasing government spending and/or taxes in order to return the economy to full employment

• discretionary policy involves policy makers doing fiscal policy in response to an economic problem
• Automatic 
• unemployment compensation & marginal tax rates are examples of automatic policies that help mitigate the effect of recession and inflation. Automatic fiscal policy takes places with out policy makers having to respond to current economic problems

Contractionary VS Expansionary Fiscal Policy

• contractionary fiscal policy: policy designed to decreased aggregate demand
• strategy for controlling inflation
• Expansionary fiscal policy - policy designed to increase aggregate demand
• strategy for increasing GDP, combating a recessionary &reducing unemployment

Expansionary Fiscal policy

• increase government spending 
•  decrease  taxes
• notice that the PL increase

Contractionary Fiscal Policy

• decrease government spending
• Increase taxes

Automatic or Built- In stabilizers.

• Anything that increases the government budget deficit during a recession and increases its budget surplus during inflation without requiring action by policy makers
• Taxes reduce spending Aggregate demand
• Reduction spending  

Transfer payment

•  welfare check
•  food stamping
•  unemployment checks
•  corporate dividends
•  social security
• veteran benefits

Progressive Tax system
Average tax rate ( tax revenue/ GDP)

  Proportional Tax System
Average Tax rate remains constant as GDP changes

Regressive Tax System
Average tax rate falls

Disposable Income

• Income after taxes or net income
• DI = Gross Income - Taxes

2 choices

  which disposable income, household can either

• consume (spend money on goods, and services )
• save (not spend money on goods & services)

Consumption

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

Do households consume if DI = O

• Autonomous consumption
• Disadvantage
• APC = C/ DI = DI that is Spent saving

Saving

• House hold NOT spending
• the ability to save is constrained by the amount of disposable income
• the propensity to consume
• Do house holds save if DI + O
• NO
• APS = S/DI=%DI that is not spent

APC and APS

• APC+APS=1
• 1-APC = APS
• 1-APS =APC
• APC > 1.Dissaving
• -APS.: Dissaving

MPS and MPC

• Marginal Propensity to consume 
• change in C/ change in DI
• % of every extra dollar earned that is spend
•   Marginal Propensity to save
•   change in S/ change in DI
• % of every extra dollar earned that is save 
• MPC + MPS = 1
• 1-MPC=MPS
• 1-MPS=MPC

Three School of Economic
Classical

• John B. Say
• Adam Smith
• David Ricardo
• Alfred Marshall
• Competition is good
• Invisible-Hand Market will take care of it's self
• Say's law supplies creates its own demand 
• AS- Determines output
• economy is always close to or always at full employment
• in the long run the economy will balance at full employment
• Trickle down effect will help the rich first then help everyone else later
• savings(leakage)= investment considered an (injection) because we invest
• prices and wages are flexible downward 
• no involuntary unemployment
• no reason you shouldn't be employed 
• what ever output is produced will be demanded no government intervention 

Keynesian

 

• John Mainer Keynes
• Competition
• AD is key and not AS
• leaks cause constant recession 
• savings cause recessions 
• believed in ratchet effects and sticky wages Block Say's laws
• In the long run we are all dead
• demand creates its own supply there fore
• savers =/ Investment and save for different reasons
• the economy is not always close to or at full employment
• prices and wages are inflexible downward
• mono-plastic competition 
• there is government intervention
• fiscal or monetary policy 

Monetary 

• Allen Green's Span
• Ben Bernanke
• Congress can time policy options
• government best control the health of the economy, by regulating banks and interest rates
• easy money- recession
• tight money- inflation
• change required reserves if needed
• Use bands through open market operation
• use interest rate to change the discount rate, the discount rate, federal fund rate. 

Investment Demand Curve 

*what is the shape of the investment down curve?
Downward sloping

why?

• when interest rates are high, fewer investments are profitable;when interest rates are low more investments are profitable

Shifts in Investment Demand (ID)

 

cost of production 

• lower cost shift ID->
• high cost shift ID <-

  Business taxes

• lower business taxes shift ID ->
• higher business taxes shift ID<-

  Technological change

• new technology shift ID->
• lack of technology change shift ID<-

Stock of Capital 

• If an economy is low on capital, then ID ->
• If an economy has much capital then ID <-

Expectations

• positive expectations shift ID ->
• Negative expectations shift ID <-

(Long run is always vertical)
 

Full employment 
Full employment equilibrium exists where AD intersects SRAS & LRAS at the same point
Recessionary GAP

• A recessionary gap exists when equilibrium occurs below full employment out put 
• Anytime have recessionary gap graph move to the left.

inflationary GA

•  An inflationary GAP exists when equilibrium occurs beyond full employment output
• Ad will move to the right

Investment Demand
Interest Rate

what is investment?

• Money spent of expenditures on
• New plant (factories)
• Capital equipment (machinery)
• Technology (hardware software)
• New homes
• Inventories (goods sold by produces

Expected Rate of Return

• How does business determine the benefits?
• How does business count the cost
• Interest Cost
• How does business determine the amount of investment my undertake
• Compare expected rate of return to interest cost
• If expected return> interest cost
• If expected return< interest cost then do not interest.

Real (r%) v. Nominal (I%) 
what's the difference?

• Nominal is the observable rate of interest. real subtract out inflation (pie%) and is only known ex post factor
• how do you complete the real interest rate (r%)
• r%= I%- pie%
• what then determine the cost of an investment decision?
• The real interest rate (r%)

Aggregate Supply
The level of real GDP (GDPr) that firms will produce at each price level (PL)

 

Long run v Short run

Long Run

• period of time where input prices are completely flexible and adjustments to change in the price level
• In the Long run, the level of real GDP supplied is independent of the price level

Short Run

• period of time when input prices are sticky and do not adjust to changes in the price level
• in the Short-run, the level of real GDP supplied is directly related to the price level

Long Run Aggregate Supply (LRAS)

• The long run aggregate supply or in the economy (analogous to ppc)
• Because input prices are completely flexible in the long-run changes in the price level do not change firm's real profits and therefore. do NOT Change firms level of full employment 

Short Run

• Because input prices are sticky in the short run, in the SRAS is upward sloping
• an increase in  GDPr, a decrease goes to the right and left
• The key to understand shifts in SRAS is per unit cost of production. 
• Per unit cost of production

Determinants of SRAS (all following affect production cost

• input prices
• productivity
• legal-institution environment

Input Prices

• Domestic Resource Prices
•   wages (75% of all business cost)
• cost of capital
• raw material (commodity prices) 
• Foreign Resource Prices
• Strong $ = lower foreign resources prices
• - weak $ = higher foreign resources pries 
• Market Power
• Monopoly and cartels that control resources
• Increases in resource prices in= SRAS <-
• Decreases in resource prices= SRAS ->

Productivity
productivity = total out put/ total input

• more productivity= lower unit production cost = SRAS ->
• lower productivity = higher unit production cost= SRAS <-

Legal- Institutional Environment

• Taxes $ to gov't on business increase per unit production cost = SRAS <-
• Subsides $ form gov't to business reduce per unit productivity cost = SRAS -> 
• Government Regulation

• - government regulation creates a cost of compliance = SRAS <-
• - deregulation reduces compliance cost= SRAS->

 

Aggregate Demand (AD) 

• shows the amount of the real GDP that the private, public & foreign.l sector collectively desire to purchase at each possible price level. 

• relationship between price level & level of real GDP is inverse.
• Three reason AD is download sloping
•  Real balance effect
• When the price level is high households and business can not afford to purchase as much output 
• When the price level is low households and business can afford to purchase more output.

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. 

Foreign Purchases Effect: 

-Higher price level increases the demand for relatively cheaper imports.

-Lower price level increases the foreign demand doe relatively cheaper U.S. Exports. 

Shifts in Aggregate Demand

There are two parts to a shift in AD

 A change in C,Ig,G & Xn

 A multiple effect that produces a greater change than the original change in the 4 component.

 increases in AD= AD--->

decreases in AD= AD <----

Consumption

 household is spending is affected by

1.  consumer wealth
2.  more wealth=more spending 
3.  Less wealth=less spending 

consumer expectations

• Positive expectation=more spending

• Negative expectation=less spending

Household indebtedness:

Less debt=more spending 

More debt=less spending 

Taxes: 

Less taxes= more spending

More taxes= less spending 

 

Gross Private investment  

-Investment spending is sensitives

The Real Interest rate

Lower real interest rate(more investment)

Higher real interest rate( less investment)

• Expected returns

Higher expected returns(more investment) (AD->)

Lower expected returns(less investments) (AD<-)

Expected returns are influenced by

• Expectations 
• Technology 
• Degrees of excess capacity  
• Business taxes 

Government Spending

More gov spending (AD->) 

Less gov spending (AD<-)

Net exports 

Exchange rates(international value of $)

Strong $=more imports and fewer exports (AD<-)

Weak $= fewer imports & more exports (AD->)

Relative income 

Strong Foreign Economies= more exports (AD->)

Weak foreign Economies=less exports (AD<-)

Unemployment: percentage of people who do not have jobs but are in the labor force

Labor force: number of people in a country that are classified as either employed or unemployed.

Ideal unemployment rate: 4-5%

Not in the labor force:

1. Kids
2. Military Personnel
3. Mentally insane
4. Incarcerated or in prison
5. Retired
6. Stay at home parents
7. Full time student
8. Discouraged workers (look for a job but can't find one)

Types of employment

1. Frictional

• used the words between jobs
• because they choose new opportunities, new choices, new lifestyles, or new educational levels

2. Structural

• technology changing
• associated with lack of skills or declining industry

3. Seasonal

• waiting for the right season to go to work
• ex: Santa Claus, lifeguard, Easter bunny, construction worker

4. Cyclical

• this is unemployment that occurs due to a swing in the economy
• deal with the business cycle 

Full employment: occurs when there's no cyclical employment

Why is unemployment bad?

1. Not enough consumption (GDP)
2. Too much poverty
3. Too much government assistance

Why is unemployment good?

1. There is less pressure to raise wages
2. There's more workers available for future expansions

Okun's law: for every 1% of unemployment above the NRU causes a 2% decline in real GDP.

So if unemployment is 3.5% we're giving up 7%

3.5 x 2 = 7

Inflation: a rise in the general level of prices
formula: new GDP deflator-old GDP deflator/old GDP deflator x 100
Inflation rate: measures the percentage increase in the price level over time; offers a key indicator of the economy's help
Deflation: decline in the general price level
Disinflation: occurs when the inflation rate declines
Consumer price index (CPI): measures inflation by tracking the yearly price of a fixed basket of consumer goods and services
indicates changes in the price level and cost of living
Find inflation rate using market basket data:
formula: current year market basket value - base year market basket value/base year market basket value x 100
Find inflation rate using price indexes:
formula: current year price index-base year price index/base year price index x 100
Estimating inflation using the rule of 70: formula: years needed to double inflation = 70/annual inflation rate
Rule of 70 is used to calculate the # of years it will take for the price level to double at any given rate of inflation
Determining real wages: formula: real wages=nominal wages/price level x 100
Finding real interest rate: formula: nominal interest rate-inflation premium
Standard inflation: 2-3%
Real interest rate: cost of borrowing or lending money that is adjusted for inflation
Nominal interest rate: unadjusted cost of borrowing or pending money

Causes of inflation:
A. Demand pull inflation: it is caused by an excess of demand over output that pull prices upward
B. Cost push inflation: caused by a rise in per unit production cost due to increasing resource cost
Effects of inflation:

• Anticipated inflation
• Unanticipated inflation

What is hurt by inflation?

• Fixed income (social security, scholarship, etc.)
• Savers
• Lenders/creditors

What is helped by inflation?

• Borrowers (debt will be repaid)

Nominal GDP: Value of output produced in current prices
can increase from year to year if either output or price increase 
formula: pxq
 
Real GDP: value of output produced in base year or constant prices
-adjusted for inflation
-can increase from year to year only if output increases
-formula: base year price  x current year quantity

Price index: is a measure of inflation by tracking changes in a market basket of goods compared with the base year
-formula: price of market basket of goods in current year/price of market basket of goods in base years x 100

GDP deflator: price index used to adjust from nominal GDP to real GDP
-in the base year, GDP deflator =100
-for years after the base year, GDP deflator >100
-for year before the base year, GDP deflator <100
-formula: nominal GDP/real GDP x100

Expenditure approach: adding up the market value of all domestic expenditures made on all final goods and services in a single year
Formula: GDP = C + Ig + G + Xn

Income Approach: adding up all the income earned by households and firms in a single year
Formula: GDP = W + R + I + P + Statistical Adjustments

• W: wages, salaries, compensation of employees
• R: rents, tenants to landlords, lease payments that corporations pay for the use of space
• I: interest, money paid by private businesses to the suppliers of loans used to purchase capital
• P: profit, corporate income taxes, dividends, undistributed corporate profits

*FORMULAS*
 
Budget: government purchases of goods and services + government transfer payments - government tax and fee collections
-if it is negative it is a budget surplus, if it is positive, it is a budget deficit

Trade:
 exports - imports
-if it is negative it is a trade deficit, if it is positive, it is a trade surplus

National Income: 

• GDP - indirect business taxes - depreciation - net foreign factor payment
• Compensation of employees + rental income + interest income + proprietor's income + corporate profits

Disposable Personal Income: 

National income -personal household taxes + government transfer payments

Gross National Product (GNP): 
GDP + net foreign factor income

National Net Product (NNP):
GNP - depreciation

National Domestic Product (NDP):
GDP - depreciation

Gross Domestic Product (GDP): total dollar value of all final goods and services produced within a country's borders within a given

What’s included in GDP?

C + Ig + G +Xn

• C: Consumption: takes 67% of the economy; final goods and services
• Ig: Gross private domestic investment: factory equipment maintenance, new factory equipment, construction of housing, unsold inventory of products built in a year
• G: Government spending Ex: buying new weapons, fort bend buying a new school
• Xn: Net exports: exports-imports

What's not included in GDP?

1. Used or secondhand goods
2. Intermediate goods: goods and services that are purchased for resale or for further processing or manufacturing
3. Non-market activities: volunteer work, babysit, illegal drug sales, trading, underground activities
4. Financial transactions: stocks, bonds, real estate
5. Gifts or transfer payments: scholarship, Christmas gift, social security, welfare payments
6. Foreign

Gross National Product (GNP): measure of hat its citizens produce and whether they produce these items within its borders

National income accounting: Economists collect statistics on production, income, investments, and savings