Absolute and Comperative advantage

Absolute Advantage

• Individual- exists when a person can produce more of a certain good/ service than someone else in the same amount of time (or can produce a good using the least amount of resources.)

•  National-exists when a country can produce more o a good/ service than another county can in the same time period.

Comparative Advantage

• A person or a nation has a comparative advantage in the production of a product when it can produce the product at a lower domestic opportunity cost than can a trading partner.

Examples of Output Problem:

• word per minute

• miles per gallon

• tons per acre 

• apple per tree

• television produced per hour

Examples of Input Problems:

• number of hours to do a job

• number of acres to feed a horse

• number of gallon of paint to paint a house

Specialization and Trade
Gains from trade are based on comparative advantage, not absolute advantage (who can do what in a certain amount of time)

 For more information on absolute & cooperative advantage you watch this video:
https://www.youtube.com/watch?v=Pd_qs8ueIWw

Mechanic of Exchange (Unit 7)

Foreign Exchange (FOREX)

• The buying and selling of currency*example: in order to purchase souvenirs in France, it is first necessary for Americans to sell their dollars and buy Euros

• Any transactions that occurs in the balance of payments necessitates foreign exchange

• Exchange Rate (e) is determined in foreign currency markets

• Exchange rates (e) are a function of supply and demand for currency- an increase in the supply of a currency- a decrease in supply of a currency will increase the exchange  rate of currency- increase in demand for currency will increase the exchange rate of currency- decrease in demand for a currency will decrease the exchange rate of currency

•  Appreciation of currency occurs when exchange rate of that currency increases (e^)

• Depreciation of a currency occurs when the exchange rate of that currency decreases

• Consumer tastes

• Relative income

• Relative price level

•  Speculation

•  Exchange rate is a determinant of both exports and imports

•  Appreciation of the dollar causes American goods to be relatively more expensive and foreign goods to be relatively cheaper, thus reducing exports and increasing imports

• Depreciation of the dollar causes American goods to be relatively cheaper and foreign goods to be relatively more expensive thus increasing exports and reducing imports

Flexible Rates

• Depends upon supply and demand of that currency vs. other currencies

• Very sensitive to business cycle / provide options for investments

Changes in Exchange Rates

• Exchange rate (e) are a function of the supply and demand for currency.

Appreciation and Depreciation

• Appreciation of a currency occur when the exchange rate of that currency goes up.
• Depreciation of a currency occur when the exchange rate of that currency goes down.

Exchange Rate Determinants

• Consumer tastes
• Relative income
• Relative price level
• Speculation

Export and Import

• The exchange rate is a determinant of both exports and import.

The balance of payment (Unit 7)

The balance of payment

Measure of money inflows and outflows between the US and the Rest of the World (ROW)

• Inflows ---> CREDITS
• outflows ---> DEBITS

The balance of payments is divided into 3 accounts
      1. current account
      2. capital/ financial accounts
      3. official reserves accounts

Current Accounts

• Balance of trade or net exports
• Net foreign income
• Net transfers (tend to be unilateral)

Capital/ Financial Accounts

•  The balance of capital ownership
•  Includes the purchase of both real and financial assets
• Direct investment in the US is a credit to the capital account
• Direct investment by US Firms/ individuals in foreign country are debits to capital accounts
• Purchase of foreign financial assets represents a debit to a capital account
• Purchase of domestic financial assets by foreigners represents a credit to the capital accounts

Official Reserves 

• Foreign currency holdings of US Federal Reserve System
• When there is a balance of payments surplus the FED accumulates foreign currency and debits balance of payments
• When there is a balance of payments deficit FED depletes its reserves of foreign currency and credits balance of payments

Active VS Passive Official Reserves

• The US is passive in its use of official reserves

Formulas

Balance of Trade

Good Exports + Goods Imports

Balance of Goods and Services

Goods Exports + Service Exports   +   Goods imports + Service Imports

Current Account

Balance on goods and services + Net Investments and Net Transfers

Capital Account

Foreign Purchases + Domestic Purchases

Inflation (Unit 5)

Inflation

• Inflation - is a general raise in the price level.
• Deflation - a general declare in the price level.
• Disinflation - decrease in rate of inflation overtime.
• Stagflation - unemployment & inflation increase in the same time.

Supply side economics

• Supply side economics - make change in AS but not AD, and determend the level of inflation, unemployment rate & economic growth.
• Lower marginal tax rate induce more work tto work for a long time.
• Also make things more expensive and worth more opportunity. 

• Supply side economics support policy that promote GDP grow by arguer high marginal taxes rate along with the current such as unemployment, compensation, to work in vest innovate, and undertake entrepreneur gesture.  

Incentive to save

1.  High marginal tax rate can reduce the reward for saving & investment.
2. Consumption might increase but investment depend upon saving.
3. Lower marginal taxes rate encourage saving & investment.

• Laffer curve - it depit a teoradical relationship between tax rate & govt revenue increase from zero to some maximum level and then declain 

Creations of laffer curve

1. Reseache suggest that the important of tax rate on incentive to work, save, & invest are small.
2. Tax court also increase demand with can fuel inflation, which cause demand to exceed supply.
3. worth economy is actual locate on the curve, is different to determined.

Extending the Analysis of Aggregate supply (Unit 5)

Extending the Analysis of Aggregate supply

• SRAS: in macroeconomics this is the period in which wages (and other input price) remain fixed as price level increase or decreases.
• LRAS: period of time in which wages have become fully responsive to changes in price level.

Effect over Short - Run

• In the short run, price level changes allow for companies to exceed normal outputs and hire more workers because profit are increasing while wage remain constant
• In the level long run wages will adjust to the price level and previous output levels will adjust accordingly.

 

Equilibrium in the extended model

• The extended model means the inclusion of both the short run and LRAS come.
• The long aggregate supply curve is represented with a vertical line @ full employment.

 

Demand pull inflation

• Demand pull - price increase based on increase in aggregate demand.
• In the short run, demand pull will drive up prices, and increase production.
•  In the long run, increase in aggregate demand  will eventually return to previous levels.

 

Cash push & the extended model

• Cost - push arises from factor that will increase per unit costs such as increase in the price of a key resource.

 

Dilemma for the Gov't

 

• In an effort to fight cost - push, the gov't can react in two different ways.
• Action such as spending by the gov't could begin an inflationary spiral.
• No action however  could lead to recession by keeping product and employment levels declining.

 

 

• LR Phillips curve

 

 

 

• Natural rate of unemployment is held constant.

• Because the LRPC exists at the natural rate of unemployment, structural change in the economy that affect unemployment will also cause the LRPC to shift.
• Increase in unemployment shift LRPC to the right
• Decrease in unemployment shift LRPC to the left

 

 

21 March 2016 (Unit 4)

3 Tool of Monetary Policy

The Required Reserve

1. The RR : Only a small percent of your bank deposit is in the safe.
1. The fed set the amount that bank must hold.
1. When the FED increase the money supply it increase the amount of money held in the bank deposit.
2. If there is in a recession, what should the FED do to the resserve requirement?
1. Decrease in the RR
2. MS increase, interest rate decrease, AD increase

1. If there is inflation, what should the FED do to the reserve requirement?
1. Increase in the RR
2. MS decrease, interest rate Increase, AD decrease

The Discount Rate

• The discount rate is the interest rate that the FED charge commercial banks.
• EX : If bank of America need $10 million, the borrow it from the U.S. Treasury (which the FED controls) but they must pay it back with interest.
• To increase the money supply, the FED should Decrease the discount rate (Easy money)

The open market Operations

• The FED buys & sells government bonds (securities)
• To increase the money supply, the FED should buy bond.
• To decrease the money supply, the FED should sell bond.

•  Federal Fund Rate : The rate at which member of bank loan each order over night loan.
• prime Rate : Interest that bank gives to there most credit wordy customer.

• When a customer deposit cash or withdraws cash from there deposit account, it has no immediate effect on money supply.
• Single Bank - loan money from Excess reserve
• Banking System - ER * MM = Total money supply
• It only changes- The Composition of the money, Excess Reserve, and Required Reserve.
• When the FED buys or sells bonds, ER is credited.

11 March 2016 (Unit 4)

• When the FED buys bond, it increases the money supply.

• When the FED sells bond, it decreases the money supply.

10 March 2016 (Unit 4)

Function of the FED

1. Issue paper currency 
2. Set reverse requirement
3. Lend money bank & charge them interest 
4. Check clearing service for bank
5. Act as personal bank to government 
6. supervise member banks 
7. Control money supply in the economy

• The Required reserve ratio in the % of demand deposit ( Checking account balances) that must not be loaned out.
• Required Reserve Ratio = 10% (when is set by the government).

Multiple Deposit

• Type 1 : Calculate the intial change in excess reserve.
• Type 2 : calculate the change in loans in the banking system.
• Type 3 : Calculate the change in the money supply 

9 March 2016 (Unit 4)

Time Value of Money 

• Is a dollar today worth more than a dollar tomorrow?
  • Yes
   
• Why? 
• Because of inflation & opportunity cost 

• Let V = future value of money 
• P = Present value of money 
• r = real inflation rate (nominal rate - inflation rate)
• N = years
• K = number of times interest is credited per year.

• The simple interest formula 
• V = (1 + r)^n * P

• The compound interest formula
• V = (1 + r/k)^nk * P  

• Demand have an inverse relationship between nominal interest rates and the quantity of money demanded.
• When the interest rate increase, the money demand decrease.
• When the interest rate decrease, the money demand increase.

The Demand for money

 

• Money demand shifter 
• Change in price level
• Change in income
• Change Taxation that affect investment 

the money supply

•  How does this affect AD
  • Money supply Increase - Interest rate decrease - Investment increase - AD increase 
  • Money supply decrease - Interest rate increase - Investment decrease - AD decrease  
  Financial Asset
  Stocks & Bond 
  Future benefit
  What you own
  
  
  • Stock - financial asset that convey ownership in company.
  • Bond - promise to pay a certain amount of money + interest in the future

  What Bank Do 

  • A bank is a financial intermediary
  • Uses liquid assets (i.e. bank deposit) to financial the investment of borrowers.

  • Process is known as Factional Reserve Banking.
  • A system in which depository institution hold liquid assets less than the amount of deposits
  •  Can take the form of (currency in bank vaults & Bank reserve)
   
   
  Basic Accounting Review
  • T - Account (Balance sheet)
  • Assets (Amounts owned)
  • Liabilities (Amount hole)

4 March 2016 (Unit 4)

• Uses of money
• Medium of exchange: is what people trade for goods and services.
• Unit of account: It establish economic worth in the exchange process.
• Store of value: Money hold is value over a period of time, where as product may not

• Type of Money
• Commodity Money: Involves the use of an actual good in place of money.
• EX: Gold coin, Silver coins

• Representative Money: its a paper money back by something tangible that give it value.
• EX: I    O   U

• Fiat Money: there money because the government sad so.

• Characteristic of Money 
• Durable 
• Portable
• Divisible
• Uniform
• Acceptable

• M1 money supply: currency (coin & cash), check-able deposit (demand deposit), traveler check.
• 75% money will come from M1
• It the most liquid able (easy to break down)

• M2 money supply: M1 money + saving account + deposit held by banks out side of the U.S.
• Not really liquid able (easy to break down)

• M3 money supply: M2 + certificate of deposit they held by private institution.
• If you put your money out to early, you be penalize.

Video

Video

Video over unit 4 - Monetery policy

Video 1

Type of money

• Commodity money - involves the use of an actual good in place of money.

• Representative money - is money that can be exchanged for a commodity at a fixed rate.

• Fiat money - is money that has no value except as the medium of exchange; there is no inherent or intrinsic value to the currency. 

Three function of money

• Medium of Exchange - is what people trade for goods and service.

• Store of value - is a means for holding wealth.

• Unit of Account - is the measure in which prices are quoted. 

Video 2

Money Market Graph

 

• Shift the supply curve (always vertical ) when the FED changes the money supply to change nominal
• As the interest rate increase, the quantity of money demand decrease.
• As the interest rate decrease, the quantity of money demand increase.

 

• The money supply curve only move to the left and right.

• The money demand line only move up and down.

Video 3  

Tools of Monetary policy

•  Expansionary monetary policy - occur when a central bank acts to increase the money supply in an effort to stimulate the economy. When the FED buys bonds, it injects new funds directly into the loan-able funds market. this action increases the supply of loan-able funds and decreases the interest rate.

• Contractionary monetary policy - occurs when a central bank acts to decrease the money supply. When the FED sells bonds, which pulls funds out of the loan-able funds market. This action decrease the supply of loan-able funds and increase the interest rate.

Video 4

The loanable funds market

 

• Supply loanable funds depend on savings.
• An increase in the supply loanable funds means the quantity will increase and the interest rate will decrease.
• A decrease in the supply loanable funds means the quantity will decrease and the interest rate will increase.
• The supply loanable funds only move to the right or left.
• An increase in the demand loanable funds means the interest rate will decrease.
•  A decrease in the demand loanable funds means the interest rate will decrease.

 

Video 5

Money Creation process

*Banks create money buy making loans.

• Reserve Requirement (RR) -  is the amount of money that is required by the FED that banks should keep on any deposit. 

RR = 20%                                                                                            Loan amount = $500

Question: Total $ created

$ multiplier =1/RR               1/0.2  = 5                         5*500=   2500

Video 6

Relating the money market graph, Loanable graph, AD - AS Graph

• An increase in the demand, will increase the interest rate and the price level.

* The supply line on left graph can only move left and right.

* The supply line on the middle and right graph move up and down.

29 February 2016 [Fiscal Policy (Unit 3)]

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 debt
- sums of all deficits - sums of all surpluses

Government must borrow money when it runs a budget deficit

Government borrows from
- individuals
- corporations
-financial institutions
-foreign entities or foreign government

Fiscal Policy Two options

• 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, combatting a recessionary &reducing unemployment

Expansionary Fiscal policy
-increase government spending (G ^)
- decrease  taxes (Tv)

•  Notice that the PL increase

Contractionary Fiscal Policy
-Decrease government spending
-Increase in taxes

• Notice that the PL Increase

For more on this topic, you can go to the link below

https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=video&cd=1&cad=rja&uact=8&ved=0ahUKEwiN3J3s067LAhVGaD4KHUmvCwAQtwIIHDAA&url=https%3A%2F%2Fwww.youtube.com%2Fwatch%3Fv%3DotmgFQHbaDo&usg=AFQjCNF7ONXEGSpxiSC3UxIlsvXsLvF8hw&sig2=8EkWaGarOvPyRe-DSGRoeg&bvm=bv.116274245,d.cWw

25 February 2016 [Consumption and Saving (Unit 3)]

Consumption and Savings

Disposable Income: Income after taxes or net income

DI = Gross Income - Taxes

2 choices

•  With disposable income, household
• Consume (Spending money on goods and service
• Save (not spend money on goods and 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
• Dissaving

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.: dis-saving

-APS.: Dis-saving

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

22 February 2016 [SRAS (Unit 3)]

Note on SRAS

• Nominal Wage: The amount of money receive be worked per unit of home.
• by the hour 
• by the day 
• Real Wage: It is the amount of goods and service a worker an purchase with their nominal wage.
• It is the purchase of your nominal wage
• Sticky Wage: Nominal wage level that is set according to an initial price level and does not very dew to labor contract and other restriction.

                                 

                                       

• Classical Range (inflation)
• Price: Flexible 
• Wages: Flexible 
• Employment level: Fixed
• Implication: Output is independent of changes in the price level.
• Intermediate Range (Upward sloping)
•  Price: Flexible 
• Wages: Fixed
• Employment level: Flexible
• Implication: output depend upper changes in price and employment level.
• Keynesian Range (Recession)
• Price: Fixed 
• Wages: Fixed 
• Employment level: flexible
• Implication: output depend upon change in the unemployment level.

Investment Demand

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 costif 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 factorhow 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%)

19 February 2016 [Full Employment (Unit 3)]

Full Employment

• Full employment equilibrium exist where AD intersects SRAS & LRAS at the same point.

                                                 

Recessionary Gap

• A recessionary gap exists when equilibrium occurs below full employment output.

                                              

Inflationary Gap

• An inflationary gap exists when equilibrium occur beyond full employment.

                                            

18 Febraury 2016 [Aggregate Supply (Unit 3)]

Aggregate Supply

Aggregate supply: The level of Real GDP (GDPR) that firms will produce at each price level (PL).

• Long-run: Period of time where input prices are completely flexible and adjust to changes 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 where 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 (LRAS) marks the level of full employment in the economy (analogous to PPC)
• Because input price are completely flexible in the long-run, change in price level do not change firms real profit and therefore do not change firms level of output. This means that the LRSA is vertical at economy level of full employment.

• Short-run Aggregate Supply (SRAS)
• An increase in SRAS is seen as a shift to the right SRAS
• A decrease in SRAS is seen as a shift to the right
• The key to understanding shift in SRAS is per unit cost of production.

Determinate of SRAS

•  Input prices
• Productivity 
• Legal-Institutional Environment

1. Input prices: Wages (75% of all business cost) 
1. Cost of capital
2. Raw material (commodity price)
3. Foreign resource price
• Strong $ = lower foreign 
• Weak $ = strong foreign 
• Increase in resource price = Less SRAS 
2. Productivity 
1. Productivity = Total output / Total input
2. More productivity = lower unit production cost = SRAS -->
3. Lower productivity = higher unit productivity cost = SRAS <-- 
3. Legal - Institute environment 
1. Taxes and Subsides
• Taxes on business increase per unit production cost = SRAS <--
• Subsides to business reduce per unit production cost = SRAS -->
2. Government Regulation
• Government regulation creates a cost of compliance = SRAS <--
• Deregulation reduces compliance cost = SRAS -->

12 Febraury 2016 [Aggregate Demand (Unit 3)]

Aggregate Demand

• Aggregate demand is the demand by consumer, business, government, and foreign countries.
• What definitely doesn't shift the curve?
• Change in price level cause a move along the curve
• Aggregate Demand (AD) = C +I + G + Xn

Three reason why AD is downward sloping

1. Real balance effect
• High price levels reduce the purchasing power of money.
• This decreases the quantity of expenditures.
• Lower price levels increase purchasing power and increase expenditures        .
2. Interest-Rate effect 
• When the price level increases, lenders need to change higher interest rates to get a REAL return on their loans.
• Higher interest rates disscourage consumer spending and business investment.
3. Foreign trade Effect
• When U. S. price level rises, foreign buyers purchase fewer U.S. goods and Americans buy more foreign goods.
• Export fall and imports rise causing real GDP demanded to fall. (Xn Decreases).

Shifter of Aggregate Demand

GDP = C + I + G + Xn

Shifter of Aggregate Demand

GDP = C + I + G +Xn

Two parts to a shift in AD

• A change in C, Ig, G, and Xn 
• A multiplier effect that produces a greater change than the original change in the 4 components.
• Increase in AD = AD -->
• Decrease in AD = AD <--

 Increase in AD

 

 

 

 

 

Decrease in AD

 

  

 

Determinate of AD

Consumption

1. Consumer wealth AD
• More wealth = AD -->
• Less wealth = AD <-- 
2. Consumer expectations
• Positve EX = AD -->
• Negative EX = AD <--
3. Household indebtedness  
• Less debt = AD -->
• More debt = AD <--
4. Taxes
• Less taxes = AD -->
• More taxes = AD <--

 

Gross Private Investment

• Investment spending is sensitve to the Real interest rate
• Lower Real interest rate = more investment
• Higher Real interest rate = less investment 

• Expected returns are influence by technology and expectation of future profitability.
• High expected return = More investment
• Low expected return = Less investment

• Government spending 
• More government spending = More investment
• Less government spending = Less investment

• Net Export are sensitive to exchange rules (international value of $)
•  Strong $ = More import and less export
• Weak $ = Less import and more export 
• Relative income
• Strong foreign Economy = More Exports
• Weak foreign Economy = Less Export

5 february 2016

GDP Gap: the amount by which actual GDP falls short of potential GDP.

Okun's Law: for every 1% that the actual unemployment rat6e in which the actual unemployment excludes the actual rate at unemployment. A GDP gap of about 2%.
EXAMPLE-  In 2012 the unemployment rate for Mexico was 7.4% and the NRU was 6%

Rule of 70: It is used to determine how many years it will take for a value to double given a particular annual growth rate.

If you put $20,000 in the bank and it earns year interest of 7% how many years will it take your income  to double.

70 divided
-------------
interest rate

In the problem above you would do 70/ 7 which will give you 10%


ALWAYS DIVIDE BY 70

For more information on Okun's Law you can check this link:
https://www.youtube.com/watch?v=y-XArN4h8nw

For more information on Rule of 70 you can check this link
https://www.youtube.com/watch?v=AoQJz1N6pxc

4 February 2016

Unemployment- failure to use available resources particularly labor to produce desired goods and services.
*Example: people now working



Underemployment-  Examples: * When a school has so much talent but we don't use it
                                                   * Working less than 12 hours a week

Labor Force- above 16 years of age and those who are able and willing to work
                               (employ + unemployed)
                                 -equation above makes up the labor force

Not in labor force- Military (majority time in other countries), students, retired people, disabled. home makers (stay at home mother/ father), mental home institutes, jail/prison, those who are not looking for a job

Unemployment rate- 4-5%= full employment or Natural Rate of Unemployment (NRU)
* having a percentage under 4% is great

How to calculate the unemployment rate: 

                                                 # of unemployed
                             --------------------------------------------- x 100
                                # of employed + # of unemployed

  Types of unemployment

Frictional: those who are searching for a job, they are temporally unemployed or in between jobs, transferable skills but not working.

                   *Examples- college and high school graduates, people that were laid off 

Structural: change in structure of the labor force made some skills obsolete, these people have no transferable skills and their jobs may never come back. Must learn new skills to get a new job.

                *Example- NASA employee getting laid off

Seasonal: due to the time of year and the nature of the job 

                *Examples-school bus drivers, life guards, Santa Clause and Easter bunny impersonator,                        construction workers

Cyclical: unemployment that results in economic down turn such as recession as demand falls for goods and services, demand for labor falls and workers are laid off.

             -full employment means there is no cyclical unemployment

Equation:  Frictional + Structural= Natural Rate                                                                                           of Unemployment (NRU)

2 Febraury 2016

GDP Deflation- price index used to adjust from nominal to real GDP

equation:    Nominal GDP
                 ------------------- x 100 = GDP Deflation
                   Real GDP

- BASE =  Nominal and Real GDP

- in the base year the GDP defoliator equals to 100

- years after base year GDP defoliator is greater than 100

- years before the base year GDP defoliator is less than 100


Consumer Price Index ( CPI ) - most commonly used measurement of inflation

- measures the market basket of goods for a typical urban American family

equation:  Price of a market basket of goods in the current year price
               ------------------------------------------------------------------------ x 100
                 Price of the market basket of goods in the base year price


Inflation:

equation:   Price index in  year 2 - price index in year 1
                 -------------------------------------------------------- x 100
                                     Price index in year 1




REAL INTEREST RATES 
- percentage increase in purchasing power that the borrower must pay the lender for a loan.

equation:    Nominal interest rate - inflation

(answer is usually under 10)

-unanticipated inflation (not expected)

- adjusted for inflation


                                                                    VS

NOMINAL INTEREST RATES
- percentage increase in money the borrower must pay the lender for a loan

equation:       Nominal interest rate = expected interest rate + inflation premium

- Anticipated inflation
     * fisher effect

- not adjusted for inflation





                                                  UNANTICIPATED INFLATION
Hurt by inflation


1. Savers
2. Creditors/ lender ( people you owe)
3. People who are on a fixed income (Welfare, Elderly, Retire, Medicare, Medicate)

Hurt by inflation

1. People who owe debt




Cola adjustment (elderly)

-automatic wage increase when inflation occurs

     *New York
     *California
-cost of living adjustment

1 February 2016

• Budget Equation
• Government purchases of goods and services + government transfer payments - government tax and free collection.

• Trade Equation
• Export - Import

• National Income
• Compensation of employees + rental income + interest income + corporate profits + proprietors income
• GDP - indirect business taxes - depreciation - net foreign factor payment

• Disposable Personal Income (DPI)
• national income - personal household taxes + government transfer payment

• National Domestic Product
• GDP- depreciation

• Net National Product
• GNP - depreciation

• Gross National Product
• GDP + net foreign factor payment

• Budget
• Deficit +
• Surplus -

• Trade
• Surplus +
• Deficit -

• Normal GDP- is the value of out put produced in current year prices (quantity)
• Can increase from year to year if either out put or prices increases

• Real GDP- is the value of out produced in constant or based year prices (adjusted for inflation)
• can increase from year to year only if quantity increases

Deprecation is know as consumption of fixed capital

Use Real GDP to measure economic growth

Use Nominal GDP to measure price increase