UNIT II

UNIT II

4 Types of economic system:

•  Command (centrally planned) 
• Government owns the factors of production
• Does not support or encourage new ideas and technology
• ex: Cuba
• Traditional
• Relies on habits, rituals, or customs
• Elders usually makes the decisions
• ex: tribes
• Free Market
• People in firms act in their own self-interest
• Allows for buyers and sellers to exchange goods and services
• ex: Hong Kong
• Mixed
• The government controls some aspect of business production
• ex: U.S. , Canada

The 3 economic questions:

1. What goods and services should be produced?
2. ow will the gods and services be produced?
3. For whom will the goods and services be produced? 

NOTES

- Market - an institution/mechanism allowing buyers and sellers to make and trade goods and services

• Product - buyer is usually a consumer and seller is a firm
• Factor - buyer is the firm and seller is factor owner (most important factor is labor)

- Households - a person or group of people that share their income
- Firms - an organization that produces goods and services for sale

- GDP  (Gross domestic product) - Total value of all final goods and services produced within a
                                                  country's borders within a given year

• GDP = Personal consumption + Gross private domestic investment + Gov. spending of goods and services + net exports | (net exports = exports - imports)
• refer as: C + Ig + G + Xn
• Includes - all production or income earned withing the U.S. by U.S. and foreign producers
• final goods and services | earned income | W.R.I.P. (wage, rent, interest, profit) | interest payments on corporate bonds | current production of goods and services | unsold output (inventory)
• Excludes - production outside of U.S. even by Americans
• used goods | gifts (private or public) and transfers (ex: Soc. Security) | stock | unreported business activity | illegal activity | financial transaction between banks and/or businesses | intermediate goods | non-market activity (ex: babysitting)
•  Expenditure Approach - income generated from production of goods and services
• equation = C + Ig + G + Xn 
• Income Approach - income generated from final goods and services
• equation =  W + R + I + P + statistical adjustments

- GNP (Gross national product) - Total value of all final goods and services produced by Americans
                                                in a given year

• Includes - production or income earned by Americans anywhere
• Excludes -  production by non-Americans even in the U.S.

- Deflation - decline in general price level
- Disinflation - interest rate itself declines
- Standard Inflation Rate = 2-3%
- Rule of 70 - how long it takes for inflation to double (in years) = 70 / annual inflation rate
- Real Interest Rate - Nominal interest rate - inflation
- Causes of inflation

• Demand Pull
• Caused by an excess of demand over output that pulls prices upward
• Sources: increase in government purchases | excessive increases in the money supply (hyperinflation) | rising income as economy approaches full employment
•  Cost Push
• Caused by a rise in per unit production cost due to increasing resource cost
• Sources:
• Supply Shock - dramatic increase in energy/raw material prices due to inpit shortages or growing input demand
• Price Wage Spiral - workers seek higher wages to offset rise in consumer prices

- Effects of inflation (Anticipated vs Unanticipated)

• Unanticipated inflation has stronger effects because those expecting inflation maybe able to adjust their work or spending activities
• wages and pensions have costs of living adjustments built in to offset anticipated inflation
• expected inflation increase the nominal cost of borrowing while unexpected inflation reduces the real cost of borrowing
• Those hurt are the ones who - lend, save up money, and those with fixed income
• Those who benefit are borrowers

- Unemployment - failure to use available resources
- Employed - includes those that are self-employed
- Unemployed - new entry to the job market OR

1. Re-entrant - re-entering the job market
2. Laid off - position has been down-sized
3. Fired
4. Quit

- Not in labor force - armed services, home makers, students, retirees, disabled, mental institution, in prison
- Unemployment rate: (# of unemployed / total labor force) * 100
             - standard rate of unemployment is between 4-6%

Types of Unemployment 

• Frictional - temporary, short-term, transition
• Ex: recent grduates looking for a job | people who quit/fired and looking for a better job 
• Signals new job openings..'
• Cyclical - caused by the recession stage of the business cycle due to a deficient demand for goods and services
• Job loss that will come back
• Structural - deals with technology and long-term change
• automation - results from job loss due to change in consumer taste
• creative destruction - as new jobs are created, others are lost 
• Seasonal - depends on weather/season
• Ex: Santa, Easter Bunny
• 
  

FORMULAS

- Net National Product (NNP) = GNP - depreciation

- Net Domestic Product (NDP) = GDP - depreciation

- National Income (NI) [ 3 equations ]

1. = NNP - Indirect Business Taxes (IBT)
2. = CE (wages) + Ri (rent) + Ii (interest income) + CP (corporate profits) + PI (proprietor's income)
3. = GDP - IBT - depreciation - Net foreign factor payment

- Disposable Person Income (DPI) = National Income - Household Tax + Government transfer payments (GTP)

- Trade = Export - Import

• Positive = Surplus | Negative = Deficit

- Budget = Government purchase of goods and services + GTP - Government tax and fee collection

• Positive = Deficit | Negative = Surplus

- Nominal GDP - measures GDP in current dollars, no matter the produced output

• = Price * Quantity

- Real GDP - measures GDP in constant dollar. Adjusted for inflation by holding the purchasing power of the dollar constant

• = Price * Quantity

- GDP Deflator - (Nominal GDP / Real GDP) *100
- Inflation - a rise in the general price level

• = [(Price index of year 2 - Price index of year 1) / Price index of year 1] * 100

- Consumer Price Index (CPI)

• (Price of market basket in a year / Price of same market basket in previous year) * 100