Unemployment

Unemployment - Percentage of people who do not have a job but are part of the labor force

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

Unemployment rate: equals (the number of unemployed / number of employed + number of unemployed ) x 100

The ideal rate is 4-5 %

Not in the labor force-

1.      Kids

2.      Retired people

3.      Military personnel 

4.      Mentally insane

5.      Incarcerated 

6.      Full time student 

7.      Stay at home parent

8.      Discouraged workers  

Types of unemployment:

Frictional - Between jobs because you choose new opportunities new choices new lifestyles or educational levels 

Structural - Lack of skills or a decline in industry or change in technology 

Seasonal - People are waiting for the right season to go to work 

Ex. Santa Claus; Lifeguards 

Cyclical – Occurs due to a swing in the economy; downturns in business cycle

Full employment - Occurs when there is no cyclical unemployment present in the economy 

Natural rate of unemployment(NRU) –When the economy is producing at its best.

Why is unemployment good?

1.      Less pressure to raise wages 

2.      More workers available for future expansions 

Why is unemployment bad?

1.      There is not enough consumption  (GDP)

2.      Too much poverty 

3.      Too much government assistance is needed

Okun’s law - For every 1 % of unemployment above the NRU causes a 2 % decline in real GDP  

Inflation - rise in the general level of prices 

Measuring Inflation:

Inflation rate - measures the percentage increase in the price level over time  (offers key indicator of economies health)

a)       Deflation - A decline in the general price level

b)       Disinflation - It occurs when the inflation rate itself declines  

Consumer price index - 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  

Solving inflation Problems 

A)    finding inflation rate by using market basket data 

(Current year market basket value - base year market basket value / base year market basket value ) x 100  

B)    Finding inflation rate using Price indexes 

(Current year price index - base year price index / base year  price index )x 100 

Estimating inflation using the rule of 70 - used to calculate the 
number of years it will take for the price level to double at any given rate of inflation 

Years needed to double inflation = 70/ annual inflation rate  

Determining real wages = nominal wages / price level ) ×100  

Finding real interest rates = nominal interest rate - inflation premium  

Standard for inflation:

Real interest rates - Cost of borrowing or lending money that is adjusted for expected inflation (expressed as a percentage)

Nominal interest rate - Unadjusted cost of borrowing or lending money  

Causes of inflation:

Demand pull inflation - caused by excess of demand over output that pulls prices upwards 

Cost pushed inflation - Caused by a rise in per unit production cost due to increasing resource cost 

Effects of inflation: Anticipated  vs. Unanticipated  

Inflation Helps: Borrowers because debt will be repaid with cheaper dollars than those that were loaned out; Fixed Contract 

Inflation Hurts: Fixed income; Savers; Lenders / creditors  

Nominal GDP vs. Real GDP

Nominal GDP - Value of output produced in current prices

- Can increase from year to year if either output or price increase 
NGDP = Price x Quantity

Real GDP - Value of output produced in base year or constant prices

-Can increase from year to year only if output increases  

RGDP = Base Price x Quantity   

Price index - A measure of inflation by tracking changes in the price of a market basket of goods compared to the base year.

 Formula: price of market basket of goods in current year / price of market basket of goods in base year  x 100

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

• In the base year the GDP deflator = 100  
• For years before the base year it is less than 100
• For years after the base year it is greater than 100

Formula - (Nominal GDP/ Real GDP)  ×100 

Inflation formula - (New GDP deflator - Old GDP deflator / Old GDP deflator ) ×100 

Budget Formula: Government purchases of good + services + government transfer payments - government tax and fee collection 

• Positive number = deficit  

• Negative number =surplus 

Trade Formula: Exports- Imports 

• Positive number = surplus 
• Negative number = deficit

GNP Formula: GDP(expenditure) + net foreign factor payment 

Net national product (NNP) formula: GNP- depreciation 


Net domestic product (NDP) formula: GDP - depreciation 

National income formula: 

1. GDP- Inderect business taxes - depreciation - net foreign factor payment  
2. Compensation of employees + properitares income + rental income + interest income  + corporate profits  

Disposable personal income formula: national income - personal household taxes + government transfer payments  

Gross Domestic Product & Gross National Product

Gross Domestic Product (GDP) - The total money value of all final goods and services produced within a countries borders within a given year.

- Economist collect statistics on production, income, investment, and savings (national income accounting)

Gross National Product (GNP) - A measure of what its citizens produced and whether they produced these items within its borders.

What is included in GDP?
C + IG + G + Xn

1. Consumption - takes up 67% of economy; final goods and services
2. Gross Private Domestic Investment - Factory equipment maintenance; new factory equipment; construction of housing; unsold inventory of products built in a year.
3. Government spending - Military buying weapons; school districts buying buses or other equipment.
4. Net export - (Export - Imports)

Whats not included in GDP?

1. Used or second hand 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, bartering and trading.
4. Financial transactions - stocks, bonds, real-estate.
5. Gifts or transfer payments - Public payments: recipients contribute nothing to the current production. ex. social security, welfare payments. Private payments: produces no output and is simply transferring funds from one individual to another. ex. scholarships, christmas gifts.

Expenditure approach - adding 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 - adding up all the income earned by households and firms in a single year.
          W + R + I + P + Statistical adjustments = GDP
Wages Rents Interest Profit
Wages - compensation of employees and salaries.
Rent - From tenants to landlord; lease payments that corporations pay for the use of space.
Interests - Money paid by private businesses to the suppliers of loans used to purchase capital.
Profit - Corporate income taxes, dividends, undistributed corporate profits.

Circular Flow Model

The Circular flow model - represents the transactions within an economy

• Goods and Services flow clockwise

Two Markets

      1. Resource or Factor Market- The place where households sell resources and the businesses buy resources

      2. Product Market- The place where goods and services are produced by businesses and are bought and sold to the households

3 Economic Factors: 

     1. Household- Person or group of people that share income

     2. Government

     3. Firm- An organization that produces goods and services for sale