Unemployment and Inflation Rate

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

Types of Unemployment

Frictional:

1,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 

GDP RealandNominal GDP, GDP Deflator and Inflation

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)

1. nominal can increase from year to year if either output of price increases
2. real GDP can increase from year to year ONLY if output increases
3. if you want to measure economic growth, use REAL GDP
4. if you want to measure price increases, use NOMINAL GDP
5. REAL GDP is adjusted for inflation (Uses BASE YEAR)
6. 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)
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• 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
•  

Circular Flow

There are two markets 

1. factor market
2. 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