Unit 3 - Aggregate Demand (2-12-16)

Aggregate Demand: the demand by consumers, business, government, and foreign countries.

What definitely doesn't shift the curve?

•  Changes in price level cause a move along the curve.

Why is AD downward Sloping?

1) Real-Balance Effect

• Higher price levels reduce purchasing power of money, this decreases the quantity of expenditures
• Lower price levels increase purchasing power and increase expenditures
• Ex:) If balance in your bank was $50,000, but inflation erodes purchasing power, you'll likely reduce your spending

2) Interest-Rate Effect

• When price level increases, lenders need to charge higher interest rates to get a real return on their bang
• Higher interests rates discourage 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
• Exports fall and imports rise causing real GDP demanded to fall. (Xn decreases)
• Ex:) If prices triple in the U.S., Canada will no longer buy U.S. goods, causing quantity demanded of U.S. products to fall

Shifters of AD

• GDP = C + Ig + G + Xn
• There are TWO parts to a shift in AD

1. A change in C, Ig, G, and/or Xn
2. A multiplier effect that produces a greater change than the original change in the 4 components

INCREASE in AD = AD --->
DECREASE in AD = AD <--- 

 Determinants of AD

1) Consumption

Consumer Wealth

• more wealth = more spending (AD shifts --->)
• less wealth = less spending (AD shifts <---)

Consumer Expectations

• positive expectations = more spending (AD shifts --->)
• negative expectations = less spending (AD shifts <---)

Household Indebtness

• less debt = more spending (AD shifts --->)
• more debt = less spending (AD shifts <---)

Taxes

• less taxes = more spending (AD shifts --->)
• more taxes = less spending (AD shifts <---)

2) Gross Private Investment

Real Interest Rate

• lower real interest rate = more investment (AD shifts --->)
• higher real interest rate = less investment (AD shifts <---)

Expected Returns

• higher expected returns = more investment (AD shifts --->)
• lower expected returns = less investment (AD shifts <---)

Expected Returns are influenced by:

• expectations of future profitability
• technology
• degree of excess capacity
• business taxes

 3) Government Spending

• more government spending (AD shifts --->)
• less government spending (AD shifts <---)

 4) Net Exports

Exchange Rates (International value of $)

• strong $ = more imports and fewer exports (AD shifts <---)
• weak $ = fewer imports and more exports (AD shifts --->)

Relative Income

• strong foreign economies = more exports (AD shifts --->)
• weak foreign economies = less exports (AD shifts <---)

Unit 2 - Inflation & Unemployment Rate (2-2-16 to 2-5-16)

Real Interest Rate: percentage increase in purchasing power the borrower must pay the lender for a loan.
Formula = (Nominal Rate - Inflation)

Nominal Interest Rate: percentage in crease in money the borrower must pay the lender for a loan.
Formula = (Expected interest rate + inflation premium)

Who's hurt by inflation?

• savers
• lenders/creditors
• those on fixed income (elderly, welfare, social security, medicaid)

Who gains from inflation?

• Borrowers
• Those locked into contracts

COLA: cost of living adjustments, (gives automatic wage increases when inflation occurs)

Unemployment

Unemployment: failure to use available resources particularly labor, to produce desired goods and services.

Labor Force: 

• Above 16 years old
• Able and willing to work

NOT in Labor Force:

• Military
• Mental Institutions
• In jail or prison
• Retired
• Students
• Homemakers
• Not looking for job

Unemployment Rate: 4 to 5% = FULL EMPLOYMENT or NATURAL RATE OF UNEMPLOMENT (NRU)

Calculate Unemployment Rate: (# of unemployed / # of employed + # of unemployed) * 100

Types of Unemployment

1. Frictional:

• searching for a job
• temporarily unemployed
• in between jobs
• transferable skills
• someone leaving job for a better job,

      2. Structural:

• changes in structure of the labor force make some skills obsolete
• workers don't have transferable skills

      3. Seasonal:

• due to the time of the year and nature of the job
• (lifeguards, school bus drivers, construction workers)

      4. Cyclical:

• unemployment that results from economic downturns (recession)
• as demand for goods and services fall, demand for labor falls and workers are laid off

Unit 2 - GDP, Real/Nominal GDP, GDP Deflator, Inflation (1-28-16 to 2-1-16)

GDP

GDP: total market value of all final goods and services produced in a country's borders within a given year.

GNP: total market value of all final goods and services by citizens of that country of if its land or foreign land,

Included in GDP:

• 65% (C) - "Personal Consumption Expenditures"
• 17% (Ig) - "Gross Private Domestic Investment" (Factory Equipment/Maintenance, Construction of houses, unsold inventory of products built in a year)
• 20% (G) - "Government Spending"
• -2% (Xn) - "Net Exports (exports - imports)

NOT Included in GDP:

1. Intermediate Goods - good requires further processing before ready for final use.
2. Used/Secondhand Goods - avoid double counting.
3. Purely Financial Transactions - (stocks) its not physical.
4. Illegal Activity - drugs
5. Unreported Business Activity - tips
6. Transfer Payments - (Public: Social Security), (Private: Scholarships)
7. Non Market Activity - volunteering, babysitting, work for oneself

2 Ways of Calculating GDP (Expenditure vs. Income Approach)

1) Expenditure Approach: add up all spending on final goods and services produced in a given year. (GDP = C + Ig + G +Xn)

2) Income Approach: add up all of the income that resulted from selling all final goods and services produced in a given year. (GDP = (W)Wages, (R)Rent, (I)Interest, (P)Profit)

Nominal and Real GDP

Nominal: value of output produced in current prices

Real: value of output produced in constant base-year prices

(Formula = Price * Quantity)

• nominal can increase from year to year if either output of price increases
• real GDP can increase from year to year ONLY if output increases
• if you want to measure economic growth, use REAL GDP
• if you want to measure price increases, use NOMINAL GDP
• REAL GDP is adjusted for inflation (Uses BASE YEAR)
• Base Year = Earliest year if not given.

FORMULAS

NDP/Net Domestic Product: (GDP - Depreciation)

NNP/Net National Product: (GNP - Depreciation)

GNP: (GDP + Net Foreign Factor Payment)

GDP Deflator & Inflation

GDP Deflator: price index used to adjust from nominal to real GDP 
Formula = (Nominal / Real GDP) * 100

• in base year, deflator will always = 100
• in years AFTER base year, GDP is GREATER than 100
• in years BEFORE base year, GDP is LESSER than 100

Consumer Price Index (CPI): most commonly used measurement of inflation 
Formula = (Price of market basket in particular year / Price of same market in BASE year) * 100

Inflation: (GDP deflator in NEW or Current Year - GDP deflator in OLD Year / GDP deflator in OLD Year) * 100

Unit 2 - Circular Flow (1-25-16 to 1-27-16)

Circular Flow

There are 2 markets, the Factor and Product market.

In the Factor market:

• Firms buy
• Households sell

In the Product market: 

• Firms sell
• Households buy

Firms:

• buy resources
• sell products

Households:

• sell resources
• buy products