Unemployment (02/09/17)

What is Unemployment?

It is the percentage of people who do not have a job in the labor force.

Unemployment rate =                       # unemployed                           x 100

                                    # in labor force (unemployed + employed)

The standard unemployment rate is 4 - 5%

4 types of Unemployment:

1. Frictional Unemployment

• " Temporarily unemployed " or being between jobs.

•  Individuals are qualified workers with transferable skills but they aren't working.

Ex.: High school or college graduates looking for jobs.

- Individuals who were fired and are looking for a better job.

2. Seasonal Unemployment

• This is a specific type of frictional unemployment which is due to the time of year and the nature of the job.
• These jobs will come back

Ex.: Professional Santa Clause impersonators.
       - Construction workers in Michigan.

3. Structural Unemployment

• Changes in the structure of the labor force make some skills obsolete
• Workers DO NOT transferable skills and these jobs will never come back
• Worker must learn new skills to get a job
• The permanent lose of these jobs is called " creative destruction".

Ex.: repairman

4. Cyclical Unemployment

• Is the downturns in the business cycle, which will result in a recession.
• As demand for labor falls and workers are fired.

Ex.: Steelworker laid off during recessions.
- Restaurants owner fires waitress after months of poor sales due to recession.

The Natural Rate and Full Employment

Two of the three types of unemployment are unavoidable:

• Frictional Unemployment

• Structural Unemployment 

Together  they make up the National Rate of Unemployment (NRU)

Frictional + Structural = NRU (4  - 5 %)

                    ^

        Full employment

Full employment means NO Cyclical unemployment!

Okuns law: When unemployment rises a percent above the natural rate, GDP falls by about 2 percent.

Inflation (02/06/17)

Inflation

Is a general rising level of prices. It reduces the " purchasing power " of money.

PP -  it is the amount of goods and services that your money can buy.

Ex.: It takes $2 to buy today what cost $1 in 1982

It takes $6 to buy today what cost $1 in 1961

3 causes of Inflation

1. Printing for much money

2. Demand - Pull Inflation

It is caused by an excess in demand over output, that pulls prices upward.

3. Cost Push Inflation

It is caused by in rise in per unit cause of production cost due to increasing resource unit cost. [Higher production increase the cost]

Formula Inflation Rate

Current year price index - The base Year price  index  x 100

The base year price index

Rule of 70: it is used to calculate the number of years it will take, for the price level to double at any given rate of inflation.

Formula

70 / annual rate of inflation

Deflation and Disinflation

Deflation- general decline in the price level.

Disinflation- it occurs when the inflation rate itself declines.

Nominal Interest Rate: it is the unadjusted cost of borrowing on lending money

Real Interest Rate: is the cost of borrowing money, adjusted for inflation.

Real Formula=

Nominal interest rate - excepted inflation

Cost-of Living-Adjustment (Cola)

• Some works have salaries that mirror inflation.

•They negotiated wages that rise with inflation.

Consumer Price Index (CPI)

It measures Inflation by tracking the changes in the price, of a market basket of goods.

Formula

Price of market basket of goods in the current year  x 100

Price of market basket of goods in the base year

Circular Flow Model (01/26/17)

Circular Flow Model

It represents the transactions in an economy by flows around a circle.

1. Households- a person or a group of people who share in income.

2. Firm or Business- an organization that produces goods and services for sale.

For better understanding:
http://2012books.lardbucket.org/books/theory-and-applications-of-macroeconomics/s20-16-the-circular-flow-of-income.html

GDP (01/30/17)

GDP

(Gross Domestic Product)

It is the total value of all final of goods and services produced within a countries borders within a given year.

GNP

(Gross National Product)

It is the total value of all final goods and services profuced by Americans in a given year.

Formula for GDP

(Expenditure approach)

C+IG+G+Xn

Consumption(C)-  spending 67% of economy. It includes the purchase of final goods and services.

IG(Gross private domestic investment)- 18% of the economy.
- New factory equipment
- Factory equipment maintenance
- Construction of Housing
-Unsold inventury of products

G(Government spending - 17% of the economy. Government purchasing goods and services

Ex: School District buys school buses.

Xn(net exports):( Exports - Imports) - 2% of the economy.

Expenditure approach to GDP
C+Ig+G+Xn( Exports -Income)

Income approach to GDP
W~ Wages( compensation of employees/salaries)
R~ Rents
I ~ Interest
P ~ Profits
+
Statistical Adjustment

IMPORTANT FORMULAS:

Budget Surplus(-) / Deficit(+): government purchases + government transfer payment - government taxes and fee collection

Trade Surplus(+) / Deficit(-): exports - imports

National income: (1)compensation of employees + rental income + interest income + proprietors income + corporate income
(2)GDP - indirect business taxes- depreciation - net foreign factor payment

Disposable Personal Income: national income - personal(household) taxes + government transfer payments

Net Domestic Product: GDP - depreciation

Net National Product: GNP - depreciation

GNP: GDP + net foreign factor payment

Gross Investment: net investment + depreciation 

Depreciation- consumption of final capital. It is the wear and tear of capital equipment.

Nominal vs Real 

     GDP

Nominal GDP - it is the value of output produced in current prices. It can increase from year if either output or price increase.

Real GDP - it is the value of output produced in constant base year prices. It only increases if output increases.

In the base year real GDP and nominal GDP are equal. In years after the base year nominal GDP will exceed the real GDP. In years before the base year real GDP will exceed nominal year.

Example:

Earliest year = base year (if not given)

Nominal GDP 2012 = $15,000 x 10 = $150,000

                                 = $20,000 x 10 = $200,000

                                 = $150,00 + $200,000 = $350,000

Real GDP 2012 = $350,000

Nominal GDP 2012 = $16,000 x 10 = $160,000

                                 = $21,000 x 10 = $210,000

                                 = $160,00 + $210,000 = $370,000

Real GDP 2012 = $350,000

GDP Deflator

It is the price index used to adjust from Nominal to Real GDP.

Formula

Nominal GDP / Real GDP x 100

• In the base year GDP deflator will always equal 100.

• For years after the base year GDP deflator is greater than 100.

• For years before the base year GDP deflator is less than 100.

Practice!!