Inflation and Unemployment

Inflation

·         Inflation – rise of general level of prices

·         Inflation rate – measures percentage in the price level over time. Key indicator of the economy’s health.

·         Deflation – decline in general price level.

·         Disinflation – when the inflation rate declines.

·         CPI – measures inflation by tracking yearly price of a fixed basket of goods and services. Indicates changes in cost of living and price level.

·         Rule of 70 – used to calculate number of years it would take for a price level to double at any given rate.

·         Real interest rate – unadjusted cost of borrowing or lending money.

·         Demand pull inflation – caused by an excess of demand over output that pulls prices upward.

·         Cost push inflation – caused by rise in per unit production cost due to increasing resource cost.

·         Hurt by inflation – Fixed income, lenders, creditor’s, savers

·         Help by inflation – borrowers 

Unemployment

·         Unemployment – percentage of people who do not have a job but are in the labor force.

·         Labor force – number of people in a country that are classified as employed or unemployed.

·         Not in Labor Force – kids, military personnel, mentaly insane, prisoner, retirees, stay at home parents, the discouraged

·         Unemployment rate – number of unemployed/ number of unemployed + number of employed *100. 4-5% standard rate.

·         Frictional – between jobs. Quit job looking for a better one. Graduating college looking for a job.

·         Structural – associated with a lack of skills or a declining industries. High school dropout who can’t read or write. Technology changes.

·         Seasonal- school bus drivers, life guards, construction workers.

·         Cyclical – associated with downturns in the business cycle. Bad for society and individuals.

·         Full employment – occurs when there is no cyclical unemployment present in the economy.

·         Natural rate of unemployment – 4-5%

·         Bad unemployment – not enough consumption (GDP), creates too much poverty, creates too much government assistance.

·         Good unemployment – less pressure to raise wages, more workers or future expansions.

·         Okun’s Law – for every 1% of unemployment above natural rate of unemployment causes a 2% decline in real GDP.

GDP Notes

GDP and GNP

·         Economists collect statistics on production, income, investment, and savings. This is called national income average.

·         Most Important Measures of growth is GDP.

·         GDP – Total dollar value of all final goods and services produced within a countries borders within a given year.

·         GNP – total value of all final goods and services by citizens of that country on its land or on foreign land.

·         Not included in GDP –

a)    Intermediate goods – no multiple counting, only final goods.

b)    Second hand or used goods

c)    Non market activity – illegal drugs, babysitting, volunteering, etc.

d)    Final transaction – stocks, bonds, real-estate.

e)    Gifts

f)     Transfer Payments – Social security, scholarships

·         Included in GDP –

a)    Consumption – 67% of economy. All finished goods/services.

b)    Gross Private Domestic Investment – New factory equipment, construction of housing, factory equipment maintenance, unsold inventory products built in a year.

c)    Government Spending – anytime the government purchases goods and services.

d)    Net Exports = Exports – Imports

Expenditure Approach to GDP

·         Add up the market value of all domestic expenditures made on final goods and services in a single year.

·         Expenditure Approach – C+Ig+G+Xn= GDP

·         Add up all income earned by households and firms in a single year.

·         Income Approach – W+R+I+P+ Statistical adjustments= GDP

·         Wages – Compensation of employees. Salary supplements.

·         Rents – Tenants to landlords, lease payments by a corporation for a use of their space.

·         Interest – money paid by private businesses to the suppliers of loans used to purchase capital.

·         Profit – corporate income taxes, dividends, undistributed corporate profits.

·         Budget – government purchases of goods and services + government transfer payments – government tax and fee collection. Positive number is budget deficit, negative number is budget surplus.

·         Trade – exports – imports. Negative number is trade deficit, positive number is trade surplus.

·         GNP – GDP+ net foreign factor income

·         NNP – GNP – Depreciation

·         NDP – GDP – depreciation

·         National Income – GDP – indirect business taxes- depreciation- net foreign factor payments

Or

Compensation of employees + proprietors income + corporate profits +rental income+ Interest income

·         Disposable Income – NI – personal household taxes + government transfer payments

Nominal GDP Vs. Real GDP

·         Nominal GDP – Value of output produced in current prices. Can increase from year to year if output or price increase.

·         Real GDP – Value of output produced in constant or base year prices. Adjusted for inflation. It can only increase from year to year if output increases.

·         Formula – Price * Quantity

·         Price Index – measures inflation in the market basket of goods compared with that in base year. Price Market of goods in current year/ price market of goods in base year * 100

·         GDP Deflator – price index used to adjust from nominal to real GDP. Nominal GDP/ Real GDP * 100

·         In base year GDP deflator is always equal to 100. For years after the base years, the GDP deflator is greater than 100. For years before base year the GDP deflator is less than 100.

·         Inflation rate – New – old/old *100