Unit 3: Aggregate Supply

March 6, 2018

Aggregate Supply

• The level of supply of Real GDP (GDPR) that firms will produce at each Price Level (PL).

Long-Run vs. Short-Run

• Long-Run: Period of time where input prices are completely flexible and adjust to changes in the price level.
• The level of Real GDP supplied is independent of the price-level.
• Short-Run: Period of time where input prices are sticky do not adjust to changes in the price level.
• The level of Real GDP supplied is directly related to the price-level.
• Long Run Aggregate Supply (LRAS): marks the level of full employment in the economy. (analogous to PPC)

Full Employment of graph: FE, Yf, Y*

• Short Run Aggregate Supply (SRAS): Because input prices are stick in the short run, the SRAS is upward sloping.

Changes in SRAS

• An increase in SRAS is seen as a shift to the right. SRAS→
• A decrease in SRAS is seen as a shift to the left. SRAS←
• The key to understanding shifts in SRAS is per unit cost of production.

Per-unit Production Cost = (total input cost)/(total output)

Determinates of SRAS (all of the following affect unit-production cost):

• Input prices
• Domestic Resource Prices
• Wages (75% of all business costs)
• Cost of capital
• Raw Materials (commodity prices)
• Foreign Resource Prices
• Strong $ = lower foreign resource prices
• Weak $ = higher foreign resource prices
• Market Power
• Monopolies and cartels that control resource control the price of those resources.
• Increases in Resource Prices = SRAS←
• Decrease in Resource Prices = SRAS→
• Productivity
• Productivity = (total output)/(total input)
• More productivity = lower unit production cost = SRAS→
• Lower Productivity = higher unit production cost = SRAS←
• Legal-Institutional Environment
• Taxes and subsidies
• Taxes ($ to government on business increase per unit production cost = SRAS←
• Subsidies ($ from government) to business reduce per unit production cost = SRAS→
• Government Regulation
• Government regulation creates a cost of compliance = SRAS←
• Deregulation reduces compliance costs = SRAS→

Unit 3: Aggregate Demand

March 5, 2018

Aggregate Demand

Aggregate = total

• AD is the demand by consumers, businesses, government, and foreign countries.
• Changes in price level causes movement along the curve not shift of the curve.
• Shows the amount of Real GDP that the private, public, and foreign sector collectively desire to purchase at each possible price level.
• The relationship between the price level and the level of Real GDP is inverse.

3 reasons why AD is downward sloping

1. Wealth Effect
• Higher prices reduce purchasing power of $.
• This decreases the quantity of expenditures.
• Lower price levels increase purchasing power and increase expenditures.
• Example: If the balance in you bank was $50,000 but inflation erodes your purchasing power, you will likely reduce your spending.
2. Interest Rate Effect
• As price level increases, lenders need to charge higher interest rates to get a REAL return on their loans.
• Higher interest rates discourage consumer spending and business investment.
• Example: Increase in prices leads to an increase in the interest rate from 5%-25%. You are less likely to take out loans to improve your business.
3. Foreign Trade Effect

• When US price level rises, foreign buyers purchase fewer US goods and Americans buy more foreign goods.
• Exports fall and imports rise causing real GDP demanded for fall (Xn decreases)
• Example: If prices triple in the US, Canada will no longer buy US goods causing quantity demanded of US products to fall (AD).

Determinates of AD

• Consumption (C)
• Consumer Wealth (boom in stock market)
• Consumer Expectations (people fear a recession...)
• Household Indebtedness (more Consumer debt)
• Taxes (decrease in income taxes...)
• Gross Private Investment (Ig)
• Real Investment Rates (price of borrowing money)
• Future business Expectations (high expectations...)
• Productivity and Technology (new robots...)
• Business Taxes (higher corporate taxes means...)
• Government Spending (G)
• (War...)
• (Nationalized Health Care...)
• (Decrease in defense spending...)
• Net Exports (Xn) = Exports - Imports (X-N)
• Exchange Rates (if the US dollar depreciates relative to the euro...)
• National Income compared to abroad (if a major importer has a recession...) (if the US has a recession...)

"If US gets a cold, Canada gets pneumonia."

Unit 2: Unemployment

February 20, 2018

Unit 2: Unemployment

• Definition: It is the failure to use unavailable resources particularly labor to produce desire, good and services.
• Population: number of people in a country
• Labor force: number of people in a country that are classified either employed or unemployed.

• People not in the Labor force:
1. Kids
2. Military personnel
3. Homemakers
4. Institutionalized
5. Retired people
6. Incarcerated
7. Full-time students
8. Discouraged workers
• Employed:
• people who are 16 years or older that have a job
• must work at least 1 hour every two weeks.
• Unemployed:
• People who are 16 years older that do not have a job but they have actively searched for one in the last 2 weeks.
• Unemployment Rate:

(# of unemployed/ total labor force) x 100

• Total Labor Force:

# of unemployed + # of employed

Types of Employment

• Frictional: temporarily unemployed or between jobs 
• they are qualified and have transferrable skills.
• college graduates
• Seasonal: due to the time of year where their skills may be required
• Example: lifeguard, Santa Clause, Easter Bunny, Construction Workers
• Structural: changed in industry/ lack of skills
• workers do not have transferrable skills.
• Example: VCR repairer person, typewriter repairer person
• "creative destruction"- permanent loss of jobs due to being absolute
• high school "dropouts"
• Cyclical: it results from economic downturn
• Example: recession
• As demand as goods and services, demand for labor falls and workers are laid off.

• Full Employment
• 4%-5% unemployment
• there is no cyclical unemployment
• NRU (Natural Rate of Unemployment) =Frictional and structural employment

• Okun's Law: states that for every 1% that unemployment rises above the NRU, GDP will fall by 2%.
• Rule of 70: # of years required for GDP to double
• Example: If the annual inflation rate is 2%, it will take 35 years.
• Formula: 70/ inflation rate

Unit 2: Inflation

February 19, 2018

Inflation

• Definition: It is the general rise in the price level.
• Reduces the purchasing power of money
• Example: In 1972, gas cost $0.29. Today, it cost $3.
• When inflation occurs, each dollar of income will buy fewer goods than before.
• Causes of Inflation
1. Government prints too much money
2. Demand-pull inflation
• we have too many dollars chasing too few goods → demand pulls up prices
3. Cost-push inflation: higher production cost increases prices.
• Unanticipated Inflation
• Hurt by inflation
1. Lenders - loan money at fixed rates
2. People on a fixed income - people that receive social security or retirement
3. Savers
• Helped by inflation
1. Borrowers
2. People on flexible income - their money can come from various sources
3. A business where the price of a product increases faster than the price of resources.
• Nominal Interest Rate: It is the unadjusted cost of borrowing money
• Real Interest Rate: It is the cost of borrowing or lending money that is adjusted for inflation.
• Formula:

Nominal interest rate - Inflation = Real interest rate

Unit 2: GDP

February 12, 2018

GDP 

• Gross Domestic Product (GDP): It is the total market value of all final goods and services produced within a country's borders within a given year.
• Gross National Product (GNP): It is the sum of all total goods and services produced by residents of a country during a given year.
• Using foreigners to complete the work
• Intermediate Goods: Goods that require further processing before they are ready for final use.
• Example: steering wheel - a part needed to complete the final product which is a car
• What's not included in GDP?
1. Used goods/ secondhand goods
• try to avoid double or multiple counting
2. Gifts or transfer payments (can be public or private)
• Transfer payments: transferring funds for one institution or individual to another
• Private: scholarship
• Public: welfare, social security
• Produce no output
3. Stocks and Bonds - purely financial transactions
4. Unreported business activity ("Tips")
5. Illegal activity (drugs... etc...)
6. Intermediate goods
7. Non-market activities (volunteer and family work)

Formula for GDP:

GDP = C + Ig + G + Xn

•  C: Personal consumption expenditures
• 67% of economy
• Ig: Gross, private, domestic investment
1. New factory equipment
2. Factory equipment maintenance
3. Construction of housing
4. Unsold inventory of products built in a year
• G: Government spending
• Xn: Net Exports = Exports - Imports

Income Approach = Expenditure Approach

• Expenditure Approach: Asks all the producers the value of final goods and services that they produced and then add them up.
• C + Ig + G + Xn
• Income Approach: Add up all the income that resulted from selling all final goods and services produced in a given year.

W - wages (compensation of employees, salary, salary supplement)

R - rents (rental income - owed to landlords)

I - interests (interest income - based on capital)

P - profits ( corporate profits)

+

Statistical Adjustment

Formulas

• Trade 
• Exports - Imports
• negative (-) = deficit
• positive (+) = surplus
• Budget
• Government spends in 2 ways:
1. Government spending/ Government purchases goods and services
2. Government transfer fees/ payments
• Budget deficit: Total amount of money that the government borrows in a year. (Because total government spends exceeds tax and free revenue)
• Government purchases of goods and services + Government transfer payments -Government tax and fee collection
• positive (+) = deficit
• negative (-) = surplus

• National Income
• Option 1: Compensation of employees + Rental Income + Proprietors Income + Corporate Profit + Interest Income
• Option 2: GDP - Indirect business taxes - Depreciation ( Consumption of Fixed Capital) - net foreign factor payment
• Disposable Income (DPI)
• National Income - Household taxes + Government transfer payments
• Net Domestic Product (NDP)
• GDP - Depreciation (Consumption of Fixed Capital)
• Net National Product (NNP)
• GNP - Depreciation (Consumption of Fixed Capital)
• GNP
• GDP + Net foreign factor payment
• Gross Private Domestic Investment


Net Private Domestic Investment + Depreciation (Consumption of Fixed Capital

• Real GDP
• It is the value of output produced in "constant" base year prices that is adjusted for inflation.
• P x Q
• Can increase from year to year only if output increases (quantity only changes)
• Nominal GDP
• It is the value of output produced in "current prices". 
• P x Q
• Can increase from year to year if either output or price increases. (quantity and price changes)

For base year: Real GDP = Nominal GDP

• In the base year, the current price is going to be equal to the base year price.
• In years after the base year, nominal GDP exceeds real GDP.
• In years before the base year, real GDP exceeds nominal GDP.

• GDP Deflator: A price index that is used to adjust from nominal to real GDP.
• Formula:

(Nominal GDP/Real GDP) x 100

• In the base year, the GDP deflator will equal to 100.
• After the base year, the GDP will be greater than 100.
• Before the base year, the GDP will be less than 100.

• Inflation: It is a general rise in the price level
• Inflation Rate Formula:

(new-old)/old x 100

Consumer Price Index (CPI): It measures inflation by tracking the yearly price of a fixed basket of consumer goods and services. Changes in the price level and the cost of living.

Unit 2: Circular Flow

February 7, 2018

Circular Flow 

• Household: A person or a group of people that share an income.
• Firms: An organization that produces goods and services for sale.
• Factor (Resource) Market: The market in which the factors of production are brought by firms and sold by households.
• Product Market: Where goods and service are bought and sold.
• Factor Payments: 
1. Land - Rent
2. Labor - Wages
3. Capital - Interest
4. Entrepreneurship - Profits

Unit 1: Basic Economic Concepts - Business Cycle

February 1, 2018

Business Cycle 

• Definition: It is fluctuation in economic activities that an economy experiences are a period of time.

• 4 Points to a Business Cycle:
1. Expansion: A period of economic upturn when output and employment are rising.
2. Peak: Highest point; Where business activity has reached a temporary maximum.
3. Contraction / Recession: A recession and period of decline in total output, income, and employment.
4. Trough: Lowest point; Economy turn from a recession to a depression.

• 1 cycle is from trough to trough
• Average cycle is 5 to 7 years
• Recessions last about 14 months
• Peaks and troughs meaningless because we never know we are in one until its over
• Trough means the end of recession
• If a recession loses more 10% of real GDP; then it is a depression.