Unit 2

January 27, 2015

       

      Gross Domestic Product (GDP)

-          Total dollar value of all goods and services, produced within a countries borders, and within a given year

-          EX. If I was a citizen in Bangladesh Countries GDP and on GNP

·         Gross National Product (GNP)

-          Total value of all final goods and services, produced by Americans in a year

-          EX. Work in Bangladesh but citizen of America, where ever I work is put into the GNP

·         Gross Domestic Product

-          Included in GDP

Ø  Formula (C + Ig + G + Xn)

Ø  C-Consumption

o   67% of our money of the economy  - (must be final good or service)

Ø  Ig Gross Private Domestic Investment
- Factory Equipment Maintenance 

- New factory equipment

- Construction or housing

- Unsold Inventory of products built in a year (GDP 2014)

Ø  G- Government Spending

Ø  Xn- Net exports

Exports – Imports

-          Whats not included in GDP

Ø  Non-market activities (volunteering, family work, illegal drugs)

Ø  Intermediate goods- goods and services that are sold for resale or in further process (Making into a good)

     o   *Avoid Double and Multiple counting*

Ø  Used or second goods

     o   Ex. Thrift store counted 5 years ago, car 2003 sold for 2015.

Ø  Financial transaction- Stocks, bonds, real-estate

Ø  Gifts or Transfer Payments

     o   Public- Recipients contribute nothing to the current production (Ex. Welfare payments, Social Security)

     o   Private- produce no output this is where you transfer funds one private individual to another ( Ex. Scholarship)

January 28, 2015

Calculate GDP

-          Expenditure Approach

-          Add up the market value of all expected expenditure

-          C+Ig+ G+ Xn = GDP

-          Add up all the income earned by households and firms in a single year

-          Income Approach

-          W+R+I+P+ Statistical

-          Wages rents interest profit (Properties income)

-          GDP must equal the income

-          Formulas

      -          Budget

             o   Government purchases of goods and services + Transfer Payments – Government tax and fee collection

             o   If your number is positive it’s a deficit if it is negative its surplus

     -          Trade

             o   Export- Imports

     -          GNP

             o   GDP + Net Foreign factor payment

     -          NNP (Net national Product)

             o   GNP-Depreciation

     -          NDP (Net domestic product

            o   GDP-Depreciation 

     -          National Income

            o   Either one

                §  GDP – Indirect business taxes- Depreciation – fact foreign payments

                §  Compensation of employees + rental income + interest income + proprietors income + corporate income

    -          Disposable Personal Income

           o   National income – personal household taxes + government transfer payments

January 29, 2015 

  Ø  Nominal GDP

-          Value of output produced by current prices.

-          Nominal price x quantity

-          Can increase year to year if either output or price increase

  Ø  Real GDP

-          It is the value of output produced in constant or based year prices

-          Price x quantity

-          Can increase year to year only if output increase

-          The reason why Real GDP adjusted for

-          Current year x Base year

  Ø  Price index- By tracking changes in the price of in market basket of goods compared with the base year

-          Price of Market basket in current/ Price of market basket of goods in base year x 100

  Ø  GDP Deflator- is a price index used to adjust from nominal to real GDP

-          In the base year GDP deflator will = 100

-          Years after the base year GDP deflator > 100

-          Years before the GDP deflator < 100

-     Nominal GDP/ Real GDP x 100

February 2, 2015 

  Ø  Inflation- Rise of general level of prices, the standard is 2-3%

-          The inflation rate percentage increase in the price level overtime it is the key indicator of the economy’s health

  Ø  Deflation- Decline in the general price level (Item is $20 to $15)

  Ø  Disinflation- Is when the deflation declines itself

  Ø  CPI (Consumer Price Index)- Measures inflation by tracking the yearly price of a fixed basket of consumer goods and services

-          In addition CPI indicates changes cost of living and price level.

  Ø  Solving Inflation Problems

-          Inflation rate using market basket data

o   Current year market basket value – base year market basket value/ base year market basket value x 100

-          Inflation rate using price index

o   Current year price index- base year price index/ base year price index x 100

-          Estimating inflation using the rule of 70

o   The rule of 70 is used to calculate the number of years it will take the price level to double at any given rate of inflation.

o   Years needed to double inflation = 70/ annual inflation rate

-          Determining real wages (Unit 3 repeated again)

o   Real wages= Nominal price/ price level x 100

-          Find Real interest rate

o   Real interest= nominal rat e-inflation premium

o   Real interest rate- the cost borrowing or lending money adjusting to expected inflation, nominal rate is expressed as percentage.

o   Nominal Interest rate- unadjusted cost of borrowing or lending money.

  Ø  Causes of Inflation

-          Demand - pull Inflation- caused by an excess of demand over output that pulls prices upward.

-          Cost push Inflation- caused by a rise in per unit production cost due to increasing resource cost.

  Ø  Effects of Inflation

-          Anticipated- expecting it, cost of inflation adjusted, wages adjusted.

-          Unanticipated- (Had a day off but the boss said

      o   Hurt by Inflation

-          Fixed Income (Social Security etc.)

-          Savers

-          Lenders/Creditors

      o   Helped by Inflation

-          Borrowers (Debt would be repaid with cheaper dollars than those that is originally loaned out)

-          Fixed Contract