(2-4-16) Unit II Types of Unemployment, GDP Gap, and Rule of 70

Types of Unemployment

Frictional

-people searching for a job

-Temp. unemployed or in-between jobs

-Transferable skills Ex: College/High school grad. looking for job

-Leaves job for a better job

Structural

-changes in the structure of the labor force makes some skills obsolete

- workers, no transferable skills Ex: VCR's

note- the above two are inevitable

Seasonal

-Due to the time of the year and nature of the job Ex: Lifeguard, Santa Claus/Easter Bunny, School bus drivers, Construction workers

Cyclical

-Unemployment that results from economic downturns Ex: Recession

-As demand for goods and services fall, demand for labor falls, thus workers are laid off.

note- Frictional + Structural = NRU

Full Employment means NO CYCLICAL UNEMPLOYMENT!

(2-5-16) GDP Gap

GDP gap- the amount by which actual GDP falls short of potential GDP

Okun's law- for every 1% by which actual unemployment rate exceeds the NRU a GDP of about 2% occurs Ex: 2012 unemployment rate of Mexico - 7.4% NRU for Mexico - 6%-> 7.4%-6%=1.4% -> 1.4% x 2%= 2.8%

Actual - NRU = gap

(2-8-16) Rule of 70

Rule of 70- used to determine how many years it will take for a value to double given a particular annual growth rate Ex:if you out $20,000 in the bank and it earns a yearly interest rate of 7%. How many years will it take for your interest/income to double? 7/70 = 10 years

(2-2-16) Unit II Inflation/Unemployment

Inflation

Real Interest rate- % increase in purchasing power the borrower must pay the lender for a loan adjusted for inflation

Nominal Interest rate- % increase in money the borrower must pay the lender for a loan NOT adjusted for inflation

Formulas- Real interest rate = Nominal interest rate - Inflation

Anticipated inflation (Fishen Effect)

Nominal Interest Rate = Expected interest rate + Inflation premium

Unanticipated inflation - unknown

Hurt by Inflation

1.Savers

2. lenders/creditors

3. People on a fixed income (Elderly) (Welfare)

note- COLA (cost of living adjustment) - gives an automatic wage increase when inflation occurs

Helped by Inflation

1. Borrowers

Unemployment (2-4-16)

Unemployment- the failure to use available resources particularly labor to produce desired goods and services ≠ underemployment 

Labor Force

Above 16 years of age

Able and willing to work

Not in the Labor Force

1.Military

2.Mental Institutions

3. Jail or Prison

4. Retired

5. Students

6. Homemakers

7. People who are not looking for a job

Unemployment- 4 to 5% = Full employment or natural rate of unemployment (NRU)

How to calculate unemployment- # of unemployed / # of employed + # of unemployed (Labor Force) x 100

(2-1-16) Unit II Net Domestic/National Product

Net Domestic/National Product

Net Domestic Product- GDP - depreciation

Net National Product- GNP - depreciation

GNP- GDP+Net foreign factor payment

Real GDP- value of output produced in constant base year prices:can increase from year to year only if output increase;adjusted for inflation

Nominal GDP- value of output produced in current pries:can increase from year to year if either output or price increase

Note-Measure Economy use Real GDP Measure Price Increase "Inflation" use Nominal GDP

Note- the formula for both is P(price) x Q(quantity) Base year:earliest year

GDP Deflator- Price Index used to adjust Nominal to Real GDP; in Base year GDP deflator = 100 in years after base year GDP is > 100 in years before base year GDP <100 Formula- Nominal GDP/Real GDP x 100

Consumer Price Index (CPI) - Most commonly used measurement of inflation Formula- price of market basket in a yr./price of same market basket in the base yr. x 100 

Inflation- GDP deflator (current [new] yr.) - GDP deflator (old yr.)/GDP deflator (old yr.) x 100

(1-29-16) Unit II Two ways of calculating GDP

2 ways of calculating GDP

Expenditure Approach (spend)- add up all the spending on final goods and services produced in a given year Formula- GDP = C+Ig+G+Xn(Exp-Imp)

note-same answer added together

Income Approach (verbal admission to income [not used much])- to add up all of the income that resulted from selling all final good and services produced in a given year Formula - W(wages)+R(rents)+i(intrest)+P(profits)+Statistical adjustments

Compensation of Employees-includes wages, salaries, fringe benefits, social security contributions, and health and pension plans.

Rents- income of all the property owner

Interest- income from investments

Corporate Profits- income of the corporations stock holders

Proprietors Income- income of entrepreneurs or partners

(1-28-16) Unit II Gross Domestic Product

Gross Domestic Product (GDP)

GDP-The total market value of all final goods and services produced in a countries borders within a given year

Gross National Product (GNP)- The total market value of all final goods and services by citizens of that country on its land or foreign land.

Included in GDP

C (65%) -Personal Consumption expenditures

Ig (17%) -Gross Private Domestic Investment:(1.Factory equipment maintenance, 2.Factory Equipment, 3. Construction of houses, 4.Unsold inventory of products built in a year.)

G (20%) - Government Spending

Xn (-2%) - Net Exports (exports - imports)

Formula-

C+Ig+G+Xn(Ex-Im)

What is not included in GDP

1. Intermediate goods-Goods that require further processing before it is ready for final use (chips[computer])

2. Used/Secondhand good(s)- Avoids double counting

3. Purely Financial Transactions - (Stocks and Bonds)

4. Illegal Activity- (Drugs)

5. Unreported business activity-(Unreported tips)

6.Transfer Payments- Public (Social Security,VA, welfare) Private (Scholarships)

7.Non-Market Activity-Volunteering, babysitting, any work that you preform for yourself

Formulas (cont.)-

Budget- government purchases of goods and services + government transfer payments - government tax and fee collection 

+ - Deficit - = Surplus

Trade- Ex - Im + - Surplus - = Deficit

National Income-1. compensation of employees + rental income + interest income + corporate profits + proprietors income 2. GDP - indirect business taxes - depreciation - net foreign factor payment

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

(1-27-16) Unit II Circular Flow Diagram

Circular Flow Diagram

Credit for image -

https://ibecon3.wikispaces.com/file/view/Circlular_flow.JPG/61031684/Circlular_flow.JPG
Circular Flow Diagram-represents the transactions in an economy

Product Market-a place where goods and services are produced by business's

(goods and services)

Factor Market-a place where households sell resources and producers buy resources

Firms-organization that produces goods and services for sale

Household-Person or group of people that share their income -sells factors of production to businesses