Unemployment

Unemployment - The percentage of people who don't have a job but are part of the labor force.
Labor Force - The number of people in a country that are classified as either employed or unemployed.

How to Calculate Unemployment Rate
(number of unemployed / (number of unemployed + number of employed)) x 100
Labor Force : number of unemployed + number of employed x 100

Those Who Are Not Considered to Be in the Labor Force

• Kids
• Retired people
• Military personnel
• Mentally insane
• Incarcerated
• Full time student
• Stay at home parents
• Discouraged workers (looking hard for work but can't find it)

What is full employment?

• Occurs when there is no cyclical unemployment present in the economy.
• Natural rate of unemployment (NRU) is achieved when labor market are imbalanced.  4-5%

How to get NRU?

• Structural unemployment+ frictional unemployment
• We don't count homeless people, based on last job or if you file information

Why is unemployment good?

• Less pressure to raise wages
• More workers available for future expansions

Why is unemployment bad?

• Not enough consumption(GDP)
• Too much poverty
• Too much government assistance is needed

Types of Unemployment

• Frictional - You are between jobs because you chose new opportunities, choices, lifestyle and education levels (this is voluntary)
• Seasonal - People are waiting for the right season to conduct trade

• Cyclical - Associated with downturns in the business cycle
• Structural - Associated with lack of skills (illiteracy, or perhaps a shift in location) or declining industry or change in technology)

Okun's Law - For every one percent of unemployment above NRU causes a 2% decline in real GDP.

• Ex. NRU = 3.5%, we give up 7% of real GDP

Inflations

 Inflation

 A rise in the general level of prices Standard Inflation Rate : 2-3%
 Measuring Inflation

• A. Inflation Rate - Measures percentage increase in price level over time
• ~ Key indicator of economy's strength

Deflation - Decline in general price level
Disinflation - Occurs when inflation rate itself declined
Consumer Price Index (CPI) - Measures inflation by tracking the yearly price of a fixed basket of consumer goods and services
Indicates changes in the price level and cost of living
 Solving Inflation Problems

• Finding inflation rate using market basket data -

((current year market basket value - base year market basket value) / base year market basket value) x 100

• Finding inflation rate using index prices-

((current year price index - base year price index) / base year price index) x 100

• Estimating inflation rate using the rule of 70-

 Rule of 70: Used to calculate the number of years it will take for the price level to double at any given rate of inflation
Years needed to double inflation = 70 / annual inflation rate
Determining real wages
(Nominal wages / price level) x 100
Finding real interest rate
 Real interest rate = nominal interest rate - inflation premium

• Cost of borrowing or lending money that is adjusted for expected inflation (always expressed as percentage)

Nominal Interest Rate = 

• did not adjust the cost of borrowing or lending money

Causes of Inflation

•  Demand-Pull Inflation - Caused by an excess of demand over output that pulls prices upward
• Cost-Push Inflation - Caused by a rise in per unit production cost due to increasing resource cost

 Effects of Inflation

• Anticipated - Ex. In a year, we're gonna lay off people. You see it coming.

• Unanticipated - Ex. Just fired abruptly. It hits you like a freight train.

Hurt by Inflation

•  People on Fixed Income - Social security, etc.
• Savers - People who save money
•  Lenders/Creditors

Helped by Inflation

•  Borrowers, because their debt would be repaid with cheaper dollars than those that were loaned out

• Fixed Contracts - Rate cannot change

Nominal and Real GDP

Nominal GDP-

• A value of output produced in current prices 
• Formula: P x Q =
• Increase from year to year if either output or price increase 

Real GDP-

• The value of output produced in constant or base year prices
• Adjusted for inflation
• Formula: Also P x Q=
• Can increase from year to year only if output increases

Price Index-

• Measures inflation by tracking changes in the price of a market basket of goods compared to the base year
• Formula: price of market basket of goods in current year / price of market basket of goods in base year x 100 =

GDP Deflator-

• Also a price index used to adjust from nominal to real GDP 
• In base year, GDP Deflator will equal 100 
• For years after the base year, GDP deflator will be greater than 100 
• For years before the base year, GDP Deflator will be less than 100 
• Formula: nominal GDP / real GDP x 100 =

 Inflation Rate Formula-

• ((New GDP deflator - old GDP deflator) / (old GDP deflator)) x 100=

Expenditure and income approach

Expenditure Approach-

• Add up market value of all domestic expenditures made on final goods and services in a single year
• C + Ig + G + Xn = GDP

Budget Formula-

• Government purchases of goods/services + government transferred payments - government tax and fee collection=
• If the budget is a positive number, it is deficit.
• If the budget is a negative number, it is a surplus.

Trade Formula

• Exports - Imports=

How to Find GNP

• GDP + Net Foreign Factor Payment=

NNP (Net National Product)

• GNP - depreciation=

NDP (Net Domestic Product)

• GDP - depreciation National Income (Either Formula Will Work)
  1. GDP - Indirect business taxes - depreciation - net foreign factor payment =
  2. Compensation of employees + proprietor's income + rental income + interest income + corporate profits=

Disposable Personal Income

• National Income - personal household taxes + govt transfer payment=

GDP

GDP(Gross Domestic Product)-Total dollar value of all final goods and services produced within a country borders within a given year. 


GNP(Gross National Product)- It is the total value of all final goods and services produced by Americans in a year.

GDP Formula: C + Ig + G + Xn

• C- Consumption

1. 67% to the economy
2. Purchasing finished goods and services

• Ig- Gross private domestic investments

1. Factory equipment maintenance 
2. New factory equipment
3. New construction housing
4. Unsold inventory of products built in a year

• G- Government spending

1. Xn-Net exports
2. Exports- imports= 

Excluded from GDP

• Used on secondhand goods
• Intermediate goods- Goods and services that are purchased for resale or for further processing or manufacturing avoid multiple or double counting
• Non-market activity- illegal drugs, any unpaid work, doing own repairs job at home, prostitution, babysitting, and growing own vegetables in the backyard.
• Financial transaction
• Gifts on transfer payments

1. Private- Produces no outputs, transfer funds from one private individual to another. 
2. Public- recipients contributes nothing to the current output or productions

• Household - A person or a group of people that share income
• Government 
• Firm (Businesses) - An organization that produces goods and services for sale
• Resources/Factor Market - A place where households sell resources and businesses buy resources
• Product Market - A places where goods and services are produced by businesses and are bought and sold by the household