Calculate for GDP

• Budget = government purchases of goods and services + government transfer payments - government tax and fee collection
• + (positive) numbered budget = deficit
• - (negative) numbered budget = surplus
• GNP = GDP + Net Foreign Factor Income
• NNP (net national product) = GNP - depreciation
• NDP (net domestic product) = GDP - depreciation
• National income
1. GDP - indirect business taxes - depreciation - Net Foreign Factor Payment
2. compensation of employees + proprietor's income + corporation profits + rental income + interest income
• Disposable Personal Income (DPI) = National Income - personal household taxes + government transfer payments
• Trade = Export - Import

• Nominal GDP -
• value of output produced in current prices
• Real GDP -
• value of output produced in constant or base (earliest year) year prices
• adjusted for inflation
• can only increase from year to year if output increases
• Product x Quantity = normal/real GDP
• Price Index - measures inflation by tracking changes in the market basket of goods
• (price of market basket of goods in current years/ price of market basket of goods in base years) x 100
• GDP Deflator - a price index used to adjust from nominal to real GDP
• (nominal GDP/real GDP) x 100

1. base year, GDP is always equal to 100
2. years after base year, GDP deflator is > 100
3. years before base year, GDP deflator is < 100

• Inflation Rate -
• (new deflator - old deflator/old deflator) x 100

Gross Domestic Product (GDP) and Gross National Product (GNP)

GDP - most important measure of growth.

- Production within that year
- National Income Accounting - statistics that Economists collect on production, income, investment, and savings
- gross = total before adding taxes

GDP : 

• Total dollar value of all final goods and services produced within a country's borders within a given year
• What is not included in GDP?
• Intermediate goods
• no multiple counting
• only counts for final goods
• Secondhand or Used Goods
• if bought from someone else
• already counted for the year it was made
• Non-market Activity
• illegal drugs
• babysitting
• volunteering
• unpaid position, doesn't count
• Financial Transaction
• stocks
• bonds
• real estate
• Gifts or Transfer Papers
• social security
• scholarships
• What is included in GDP?
• C - Consumption
• 67% of economy
• all finished goods and services
• Ig - Gross Private Domestic Investment
• new factory equipment
• new housing
• new factory equipment maintenance
• unsold inventory of production built in a year
• G - Government Spending
• government purchase of goods and services
• Xn - Net Exports
• Exports - Imports (minus)
• Expenditure Approach -
• C + Ig +G + Xn =GDP
• add up market value of all domestic expenditures made on final goods and services in a single year
• what is bought or sold

Proof of GDP is found in receipts, GDP is more reliable than GNP.

Gross National Product (GNP) :

• total value of all final goods and services by citizens of that country on its land or on foreign land
• ex: Nike's, made by foreigners and sold somewhere else
• Income Approach -
• GDP = W + R + I + P + Statistical Adjustments
• W = wages
• compensation of employees, salary supplements
• ex: pension (retirement), health, insurance, welfare)
• R = rents
1. tenents to landlord
2. lease payment by a corporation for use of space
• I = interest
• money paid by private businesses to the suppliers of loans used to purchase capital
• P = profits, corporation profit
1. Corporation income taxes could show up as dividends, or undistributed corporation profits
• add up all of the income earned by households and firms in a single year
• this is what you report
• is based on what you say
• not reliable

Circular Flow Diagram

Circular Flow Diagram -

• represents transaction in an economy (ex: like the market)

Economic -

1. Household : person/group that shares income
2. Government :
3. Firm : organization that produces goods and services for sale

Market - 

1. Resource/Factor : place where household sells resources and businesses buy resources
2. Product : place where goods and services are produced by businesses and both are sold by household

The Business Cycle

• Expansionary - the real output in the economy is increasing and the unemployment rate is declining
• ex : we can tell the stage of expansionary when houses are being built, gas prices are dropping
• Peak - where real GDP is at its highest point
• Contraction (Contractionary) - the real output in the economy is decreasing and the unemployment rate is rising/increasing
• also known as a recession
• Trough - lowest point of real GDP
• trough means that the graph curves downward real deep
• a depression (unless GDP seriously dropped)
• one business cycle goes from trough to trough
• Average cycle is 6 years
• Recessing last about 14 months
• Bulk of a cycle is the growth stage

• Peak - Trough, are meaningless because we never know we are in one until it's over
• If a recession loses more than 10% of real GDP, then it's a depression
• Trough means the end of a recession

Demand and Supply (Graph)

Graph shows the relation between Supply and Demand:

• Equilibrium - it is the point at which the supply curve and the demand curve intersect
• means all resources are being used efficiently
• Shortage - QD > QS
• Quantity of demand is greater than the quantity of supply
• excess demand
• SURPLUS - QS > QD
• Quantity of supply is greater than the quantity of demand
• excess supply

Graph shows a Price Floor

• Price Floor - a government price control on how low a price can be charged for a product
• ex : minimum wage

Graph shows a Price Ceiling

• Price Ceiling - a government imposed limit on how high a price is charged
• ex : rent control

Demand and Supply (Supply)

• Supply Schedule - when the price increases, the quantity increases
• Supply Curve -

• Supply is quantities that producers or sellers are willing and able to produce or sell at various prices
• The Law of Supply - direct relationship between price and quantity supplied PQ
• ex: P↑ Q↑
• ex: P↓ Q↓
• What causes a "change in quantity supplied"?
• ∆ in price
• What causes a "change in supply"?
1. ∆ in technology
2. ∆ in taxes or subsidies
3. ∆ in the number of sellers
4. ∆ in the resource prices or cost of production
5. ∆ in weather
6. ∆ in expectations

Demand and Supply (Demand)

• Demand Schedule - when prices decrease, the quantity increases

• Demand Curve :

• Demand is the quantities that people are willing and able to buy at various prices
• ex: when there are doughnut on sale and people really want them, even when prices go up, doughnut-lovers will still go out to buy them

• The Law of Demand - an inverse relationship between price and quantity demanded
• ex: P↑ Q↓ (price goes up, quantity goes down)
• ex: P↓ Q↑ (price goes down, quantity goes up)

• What causes a "change in quantity demanded"?
• ∆(change) in price

• What causes a "change in demand"?
1. ∆ in buyer's taste -
• advertising
2. ∆ in the number of buyers -
• population
3. ∆ in income -
• normal goods - goods that buyers buy more of when income rises
• inferior goods - goods buyers buy less of when income rises
4. ∆ in prices of related good -
• substitute goods - goods that serve roughly the same purpose
• complementary goods - goods that are often consumed together
5. ∆ in expectations -
• what happens in the future

Elasticity of Demand:

1. Elastic Demand - tells how drastically buyers will cut back or buy more of a particular good
• product that is elastic when demand will change drastically given a small price
• ex: wants for steak, a fur coat
• E > 1
2. Inelastic Demand - a product is inelastic if demand will not ∆ regardless of price
• ex: needs for milk, gasoline, medicine (insulin)
• E < 1
3. Unit Elastic -
• ex: salt
• E = 1

Let's say someone was selling cookies for $4 a dozen and was able to sell 50 dozens. This person increases the price to $6 a dozen and was able to sell 40 dozens. Here's how to find the Elasticity of Demand:

1. % ∆ in quantity :
• (new quantity - old quantity) / old quantity
• ex: (40 - 50) / 50 = -.20
2. % ∆ in price :
• (new price - old price) / old price
• ex: ($6 - $4) / $4 = .5
3. Price Elasticity of Demand (PED) :
• -.2 / .5 = .4 , which makes it inelastic

• When calculating for PED, take the absolute value of the ∆Q's and ∆P's because E cannot be a negative number.

Production Possibility Curves

Production Possibility Curves/Frontier - shows the most that society can produce if it uses every available resource at the best of its ability

• Productive Possibility Graph:

            

• Point A : is efficient but produces more capital goods
• Point B : is efficient or attainable
• Point C : is efficient but produces more consumer goods
• Point D : is a attainable but inefficient, it under utilizes its resources
1. decrease in population
2. underemployment or unemployment
3. wars or famine
• Point E :  is the region of being unattainable
1. Technological Improvement
2. Economic Growth
3. Discovering New Resources

Key Assumptions:

1. Two goods are produced
2. Full Employment (FE)
   
• not 100% employment
• not 100% productive
• approximately 4-5% employment
• approximately 80% factory capacity
3. Fixed resources
1. land
2. labor
3. capital
4. Fixed state of technology
5. No international trade

Macroeconomics

• Macroeconomics - the study of major components of economy
• ex : inflation, supply and demand, wages, GDP
• Microeconomics - the study of how households and firms make decisions and how they interact with the market
• ex : supply and demand, market structure, businesses

• Positive Economics - claims that attempt to describe the world as it is, very descriptive and fact based
• ex : minimum wage laws cause employment
• reduction in force if there is an increase in minimum wage
• Normative Economics - claims that attempt to predict or prescribe how the world should be, opinion based
• ex : government should raise minimum wage
• TX - $7.25; if wage increases, the living cost increases as well

• Needs - basic requirements for survival
• ex : food, water, shelter
• Wants - desires of citizens, broader than needs

• Scarcity - limited
• fundamental economic problem that all societies face
• satisfy unlimited wants with limited resources
• ex : water, oil
• Shortage - situation where quantity demanded is greater than quantity supplied
• ex : when a place doesn't have what you want/need, so they go out to get more of is so they can satisfy you and keep you as their customer

• Goods - tangible commodity; bought, sold, traded, produced
1. Consumer Goods - goods that are intended for final use by the consumer
2. Capital Goods - items used in the creation of other goods such as factoring machinery and trucks
• Services - work that is performed for someone else
• ex: a Barber

Factors of Production :

1. Land - natural resources
2. Labor - work force
3. Capital -
• Human Capital - knowledge and skills a worker gains through education and experience
• ex : training on the job or in college
• Physical Capital - human-made objects used to create other goods and services
• ex : buildings and tools, factories
4. Entrepreneurship - product, inventive, and a risk-taker

• Trade-Offs - alternatives that we give up when we choose one course of action over another
• ex : there's no such thing as a free lunch
• Opportunity Cost - choosing the next best alternatives
• will exist as long as resource scarcity exists due to our endless wants and needs
• ex: choices you make when you don't get your first choice